Central banks struggle to adjust

Lenders used to short-term thinking grapple with long-term monetary policy

Schooled in economic thinking that confines monetary policy to the short run, central bankers gathering in Jackson Hole, Wyoming, are grappling with a singular change: whether they can take over as guardians of long-term growth with programmes that may stay in place and influence markets for decades to come.

The debate, being carried out in technical research and policy forums like the annual meeting here, could herald a break with decades of central bank orthodoxy which has relied on shortterm interest rates as the main policy lever in favour of a host of unconventional tools — from outright targeting a certain level of growth, to the permanent use of negative interest rates or massive cash infusions to stimulate inflation.

Shift in view

The discussion has already seen some Fed policymakers radically shift their view of monetary policy, and was more broadly joined on Friday when Federal Reserve Chair Janet Yellen delivered the opening address to the Fed’s annual policy conference here.

Though watched for clues to whether the Fed is likely to raise rates in the near future, the subject of Yellen’s speech was the Fed’s policy “toolkit,” and gave insight into how deeply she feels policy should be overhauled in light of what has been learnt since the 20072009 financial crisis and recession.

Policies put in place then have largely remained intact, much to the surprise — and chagrin — of officials including Yellen, who have expected the United States and world economies to return to a pre-crisis “normal” once various “headwinds” diminished.

Instead, the emerging vision is of a changed world where expected growth is lower, deflation remains more of a risk than rising prices, businesses hesitate to invest and individuals’ views of the future are so fully “anchored” it becomes hard to nudge them toward, for example, higher inflation.