JACKSON HOLE, WYO. – After years of bold action following the global financial crisis, the world’s central bankers are ready to pass the baton.
The consensus at the annual gathering of these stewards of the economy this year was that the power of monetary policy to drive global growth is nearing its limit. Further progress will now depend on whether government leaders are willing to step up to the plate.
“The only conclusion that we can safely draw, in my view, is that we need action on both sides of the economy,” European Central Bank President Mario Draghi said in a speech at the conference, which is hosted by the Federal Reserve Bank of Kansas City and wrapped up on Saturday. “Only if the strategy is truly coherent can it be successful.”
The normally staid world of monetary policy entered the spotlight during the financial crisis when central bankers slashed interest rates, pumped trillions of dollars into the financial system and exercised broad authority to rescue failing institutions. Their actions were unprecedented and untested – and largely credited with staving off a global depression.
But averting disaster is not the same as ensuring growth. The global economy is forecast to expand 3.4 percent this year, less than previously expected. Inflation in some countries remains dangerously low. The job market in advanced economies is still not fully healed.
Central banks set the course of an economy, but it is up to elected officials to sail the ship. The academic research and discussions at the conference here organized by the Federal Reserve Bank of Kansas City underscored that many of the roadblocks to faster growth cannot be removed by monetary policy.
"The needed reforms lie outside the mandate of central banks and fall squarely in the laps of elected officials,” said economist Peter Henry, dean of the business school at New York University. “It will do no good if central bankers give the labor market room to grow if politicians shoot the recovery in the foot.”
It is not a new message: Central bankers have been chastising government leaders for not providing more aggressive stimulus for years. The difference now is that monetary policy is also losing steam, while the challenges confronting the world economy appear increasingly structural.
In the United States and abroad, major demographic shifts are underway that are changing the face of the global workforce and the demands on social safety nets. The working-age population in China is expected to shrink by 2030 and slow dramatically in other emerging markets, replaced by a surge in sub-Sarahan Africa, according to research presented at the conference here organized by the Federal Reserve Bank of Kansas City. Massachusetts Institute of Technology economist David Autor argued that rapid adoption of new technology could also lead to a resurgence of middle-class jobs in America.
Even Fed Chair Janet Yellen questioned how much further the central bank can reduce unemployment before before risking inflation. In a speech here, she said the high number of involuntary part-time workers could be a result of globalization, as manufacturing and other middle-skill jobs move overseas. Similar forces could also be holding down wages. Meanwhile, demographic shifts could account for a significant portion of the decline in the size nation’s workforce.
Though Yellen said an easy-money stance is still justified, the moment for the central bank to begin pulling back is drawing closer. The Fed plans to stop buying bonds to pump money into the economy in October and is debating when to raise interest rates.
“The assessment of labor market slack is rarely simple and has been especially challenging recently,” Yellen acknowledged.
Even in countries where the central banks are looking to press on the accelerator, officials emphasized that they cannot go it alone. In a speech here, Bank of Japan Gov. Haruhiko Kuroda said a “visible hand” from both the public and private sectors are needed to boost wages in that country, along with a strong commitment from the central bank to ending deflation.
Meanwhile, Draghi said that the ECB stands “ready to adjust our policy stance further” after announcing a new round of stimulus measures in June. But he warned that the central bank’s efforts will be diluted if not accompanied by structural reforms, including investment in skills training and encouraging worker mobility.
“Aggregate demand policies will ultimately not be effective without action in parallel on the supply side,” Draghi said.
It remains unclear how much political leaders at home and abroad can accomplish, however. The financial crisis deepened many partisan divisions, resulting in monetary and fiscal policies that often worked against each other. The Fed pumped roughly a trillion dollars into the economy last year in an effort to jumpstart the recovery last year. Meanwhile, Congress slashed $85 billion in government spending after lawmakers failed to agree on a budget. Austerity measures helped send the 18-nation euro zone into a recession that ended only a year ago.
When the central bank and fiscal authorities do work together, the results can be dramatic. Over the past two decades, Brazil’s central bank successfully reined in inflation, established a floating exchange rate and built up a buffer of foreign reserves. Meanwhile, its government rolled out programs to alleviate poverty and shore up its educational system. The result has been a burgeoning middle class, reduced inequality and a robust economy.
“These developments in the labor market have contributed to a gradual decline of the actual and natural rate of unemployment,” Alexandre Tombini, governor of the country’s central bank.