Mohammed A. El-Erian writes: Minutes released yesterday from the latest policy-making meetings of the U.S. Federal Reserve and the Bank of England confirm that central bankers will have plenty to discuss when they gather for their annual conference in Jackson Hole, Wyoming, starting Friday.
Most important, the minutes illustrated unusual disagreements over how much more central banks can and should do to support economic growth and combat persistent unemployment.
At the Bank of England, two members of the monetary policy committee broke ranks with the majority, favoring an immediate interest-rate increase despite low inflation and no wage growth. In the case of the Fed, officials disagreed not only about how much slack remains in the labor market, but also about how to measure it — both crucial issues in determining how much longer the central bank should keep trying to stimulate economic growth.These issues will be front and center at the Jackson Hole conference, and will probably be the subject of Fed Chair Janet Yellen’s keynote speech Friday. Time is of the essence, because much of the discussion will explore whether central bankers’ moment to change course could be drawing near. As the Fed put it in its minutes, officials “generally agreed that both the recent improvement in the labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run.”
The minutes also displayed a reluctance to talk about an issue that is gaining attention as prices in financial markets become increasingly detached from underlying economic conditions: the trade-off between the immediate gains from stimulus and financial stability. A number of prominent economists are warning that the developed world may have fallen into a low-growth equilibrium known as secular stagnation, in which the extraordinary measures adopted by central banks to achieve more robust growth could ultimately destabilize financial markets. Paraphrasing what Ben Bernanke said in his 2010 speech to the Jackson Hole conference, policy makers will have to consider whether they are near or past the point where the benefits of their actions are harder to justify given rising costs and risks.
Finally, the minutes said little about what the global impact will be if the Bank of England and the Fed start easing off the accelerator at a time when the European Central Bank is likely to intensify its stimulus efforts. If the divergence persists, the further shifts in interest rates and currencies could trigger volatility in financial markets around the world. It’s a topic that definitely should also be on the agenda in Jackson Hole.
