Central bankers shun policy clues as trade pervades Jackson Hole

Bloomberg

Leaders of the world’s most powerful central banks defended post-crisis reforms at their annual retreat in Jackson Hole, Wyoming, while discussing the causes and consequences of populist waves that have reshuffled the political order in the US and Europe.
Monetary policy wasn’t a major focus during the three-day gathering. When it was discussed, the messages from the Federal Reserve and European Central Bank stressed their gradual approaches to unwinding emergency-era stimulus as global growth picks up.
Policy makers instead pored over the pros and cons of free trade and made a full-throated defense of the safety net created since the 2008 financial meltdown, which President Donald Trump wants to roll back. Britain’s vote to divorce from Europe, Trump’s election and the anti-immigrant presidential candidacy of Marine Le Pen loomed large over the event.
Top officials came out swinging against populist rhetoric. Fed Chair Janet Yellen gave her strongest defense yet of embattled financial rules, while her euro-area counterpart Mario Draghi warned of protectionism’s perils.
Economists chewed over how to mitigate globalisation’s distributional problems in a way that doesn’t subtract from already-tempered global growth. “A central element of efforts to raise productivity growth—and build a dynamic global economy— must involve responding to these concerns about openness,” Draghi said. “A turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy.”

Global Growth
Protecting growth is an important priority for central banks, because weak GDP gains curb
how high they can raise interest rates, limiting how far they can cut rates to fight a recession.
Economists generally favour free trade, because it boosts standards of living, drives down product and service costs and improves idea dispersion. But it also created haves and have-nots, driving wealth toward networked cities and the highly educated while shifting manufacturing jobs away from developed countries.
Anger over those changes became a rallying cry for leaders such as Trump, who has advocated tighter immigration controls, renegotiating trade agreements and preventing off-shoring—all with the goal of reinvigorating middle-class wages.
The US president has also been taking aim at the Dodd-Frank Act, the 2010 law enacted in response to the financial crisis, which he and congressional Republicans blame for handicapping the US economy. Yellen, in perhaps her final speech at Jackson Hole as Fed chair, took issue with Trump’s narrative.
“Core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth,” she said. “Any adjustments to the regulatory framework should be modest and preserve the increase in resilience.” Yellen’s term as chair expires in February.

Monetary Policy
Slow progress aside, the global economy is in its best shape in nearly a decade. The Fed is gradually reducing monetary accommodation and the ECB is contemplating when to begin tapering mass asset purchases, even though inflation lingers below central bankers’ targets in both places.
Jackson Hole discussions offered little insight into the outlook for those policies.
Yellen largely avoided talking about the current state of the economy or the outlook. Bank of Japan Governor Haruhiko Kuroda, said that the recent pace of growth in Japan is probably unsustainable and pledged to continue with accommodative monetary policy.

Central banks signal breathing room for emerging peers
Bloomberg

Signs from the Federal Reserve and European Central Bank at Jackson Hole that their approach to unwinding emergency-era stimulus is likely to be gradual will be welcomed in Asia.
An aggressive push for quantitative tightening by either the Fed or ECB would lure capital away from Asia’s developing economies, pressure their currencies lower and force the region’s central banks to respond by hiking rates.
But Asia remains locked in an easing cycle and there’s little prospect for any near-term tightening. Indonesia and India have both recently lowered borrowing costs in an effort to support growth and economists say Thailand could be next.
The Bank of Korea is this week expected to keep rates firmly on hold and give little signal of any plan to tighten.
Bank of Japan Governor Haruhiko Kuroda told Bloomberg TV the recent pace of growth in the world’s third-largest economy is probably unsustainable. He pledged to continue with very accommodative policy for some time. One reason: Japanese inflation remains tepid.