August 24, 2016

THEY ARE TRYING TO STAY RELEVANT TO THE 1970s:

Central Bankers' Main Challenge: Staying Relevant (GREG IP, Aug. 24, 2016, WSJ)

When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance.

The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today's low interest rates.

Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate. The fact that inflation and growth are now so sluggish despite ultra-easy monetary policy shows that the natural rate has fallen--by 1 to 2.5 percentage points since 2007 in the U.S., Canada, Britain and the eurozone, according to a recent Fed study. Fed policy makers think the U.S. natural rate is 3%, down from 4.5% before the recession. That's 1.5 percentage points less ammunition to counteract the next shock to the economy.


Won't Someone at the Fed Think of the Millennials? (Sid Verma, August 24, 2016, Bloomberg)

For the Federal Reserve to succeed in its mandated bid to anchor inflation higher, it needs to overcome a big demographic hurdle: millennials don't expect prices to rise anytime soon.

There's a good reason for that: Americans who entered the workforce from 2000 onwards have experienced a benign inflation climate, with core Personal Consumption Expenditure (PCE) price inflation averaging just 1.7 percent, below the Fed's 2 percent target. And the PCE rate hasn't breached 2.5 percent at any point since the turn of the millennium.

Central Bankers are guarding against a phenomenon that no longer exists and damaging the economy periodically by fighting it.  They need to adopt policies that are relevant to the deflationary epoch.

Posted by at August 24, 2016 5:18 PM

  

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