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Jackson Hole Drive-By Comments
I did a short trip to Lake Placid New York last weekend, and largely missed out on the Jackson Hole central banker discussion. Although some specific speeches have been important for macro debates in the past, I generally view the conference importance as over-rated. Although having an idea what the consensus is discussing is useful, the forward-looking information is limited.
In a daily newsletter for Bloomberg, Joe Weisenthal did a summary of some of the topics discussed. (I do not think there is a link to that particular newsletter?) His summary was:
So right off the bat, you can get a sense of what's lurking in the minds of policymakers top economists. Unlike in the 2010s, when we had austerity in parts of the world, now we live in a world of Big Fiscal, and central bankers want to know what it means for their job.
I will just make some random observations based on details from Joe’s comments as well as what I have seen from other reportage.
Chairman Powell seems relaxed about waiting for any rate hikes. Although they might have a couple tail end hikes, we look to be in a “plateau” situation where the next move could be up or down, while the policy rate goes sideways. Although it is more exciting to predict rates either spiralling up or down, going sideways is perfectly OK. For anyone who actually wants interest rate products more interesting than three-month Treasury bills, your main worry is the trend over the next few years. The Fed in 2025 is not going to be bound by what Powell said in Jackson Hole in 2023.
Central bankers “wanting to know what it [Big Fiscal/high debt levels] means for their job” is a bit of an embarrassing admission that neoclassical models have issues with determining the effect of fiscal and interest rate policies on the economy. This ends up buried under the “r* debate.”
Joe Weisenthal and Tracy Alloway have an interview with academic Darrell Duffie, who spoke about the balance sheet challenges of the primary dealers. I did not have time to listen to that, but that is the sort of plumbing talk that I never could get too concerned about. Regulators made market making more expensive, so we should expect primary dealers to scale back trading. That said, to the extent that there are an “illiquidity premia,” there are plenty of entities with the capacity to step up Treasury trading. The Fed’s decision to become an active player in Treasury trading also creates an obligation to smooth the market.
They also have an interview with Barry Eichengreen about public debt levels. Although developing countries with dollar pegs have reasons to be concerned about high debt levels, it is much less clear that the (non-Euro) countries need to be concerned (as I will expand upon below).
As I touched on earlier, high debt levels runs into neoclassicals fears of “fiscal dominance.” Which is a fancy way of saying that rate hikes do not dampen inflation, since they increase interest expenditures. Of course, the same neoclassicals who are worried about “fiscal dominance” are the same people who ridicule MMTers who suggest that the effects of interest rates on the economy are ambiguous, and that fiscal policy needs to take into account inflationary pressures.
Otherwise, the alleged challenges posed by high debt levels is largely a psychological problem. Nominal GDP growth will tend to eat away at the debt/GDP ratio over time, since the fiscal deficit will tend to narrow courtesy of automatic stabilisers. Attempting to tighten fiscal policy to lower the ratio needs to rely on fiscal tightening having a low multiplier, as otherwise the growth loss will trump a lower deficit, and a recession would tend to blow out the deficit. Realistically, the “problem” only goes away in the presence of robust private sector growth — which cannot be conjured with a wave of the Magical Growth Wand. We got robust growth in the 1990s, but it was fuelled by the first leg of the housing bull market that has consumed Anglo countries in recent decades.
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Interest rate sustainability is another mainstream bugaboo. One has to doff their hats to the brain trust at the Fed who decided to absorb all the capital losses that would have otherwise gone to the private sector who would have been holding the bonds at the bottom in yields. Taking away the ability of central bankers to mess around with Quantitative Easing might be the most efficient fiscal reform.