Policy discussions in the eurozone, the UK and the US increasingly revolve around the question of when and how quickly central banks should withdraw the stimulus measures implemented during the year. last in response to the pandemic.
There are no easy answers. Both sides of the question call for a finely balanced judgment to account for the uncertainties that are involved. Policy changes by major central banks can have far-reaching implications for economic and financial well-being, affecting not only people. directly involved, but also the many countries which will end up “importing” the effects of the decisions. One way to frame the debate is to think of a road trip. In the car, there are two groups who agree on three things: the âdestinationâ is to achieve high, sustainable, inclusive and sustainable economic growth; the path to get there is far from straight; and the car has good momentum forward. After that, the two camps are at odds. One group thinks much of the remaining ride will be uphill and isn’t too worried about curves along the way. He would rather keep his foot on the accelerator, pedal fully, lest the vehicle decelerate or stall.
The other passengers anticipate a downhill journey with many perilous curves. With the vehicle picking up speed, this group would rather release the accelerator and avoid risking a sudden ‘economic hand brake’, as Andy Haldane, the former chief economist at the Bank of England, recently put it. .
Whether you are a climber or a descender depends mainly on your assessment of three current issues: the job market, soaring inflation and the risk of not being able to recover quickly in the event of a policy error.
The big headache of the labor market is that, despite massive demand, the labor market is unable to match the unemployed with jobs. The situation is particularly dire in the United States. While data from the April Job Openings and Workforce Turnover Survey (the most recent available) shows that there are a record number of job openings in the United States. United – over nine million – labor force participation remains stubbornly low and unemployment high, compared to pre-pandemic levels.
To explain this gap, some cite temporary and reversible factors such as school closings, increased unemployment insurance benefits and insufficient childcare services, while others worry longer term problems such as altered propensity to work and skills mismatch. In any event, persistent labor market dysfunctions, including employers’ struggle to find employees, are expected to lead to higher wages, a possibility that is fueling concerns about the second issue.
How âtransientâ is current inflation? The pedal-to-metal camp has a surprisingly strong conviction that the current rise in inflation will suddenly reverse. As the year progresses, they expect the base effects to fade along with the disparities between supply and demand.
Others, including me, are not so sure, due to the likelihood of persistent bottlenecks, changes in supply chains, and issues with sustainable inventory management. We will likely need several months of additional data before we can come up with convincing assessments of these variables.
In the meantime, decision-makers need to be aware of the risks associated with any given course of action, including inaction. In the face of such uncertainty, it is wise to ask not only what could go wrong, but also what would be the consequences of a political error. Under current conditions, a misstep could have far-reaching and lasting effects.
Supporters of sticking to the wall argue that central bankers still have the tools to beat inflation if it persists. But as the descenders are quick to point out, these tools have become increasingly inefficient and difficult to calibrate. As such, a lagging central bank may be forced to brake, risking economic recession and instability in financial markets. The risk of inaction (or inertia) in this case may be greater than that of acting early.
In the current political debate, this decision-making framework offers the greatest clarity around the edges. For example, there is a compelling case for the US Federal Reserve to start loosening its foot on the accelerator. Economic growth is strong, fiscal policy is also extremely expansionary, and businesses and households alike have accumulated significant savings that they will now spend. The conditions are now in place for the Fed to start gradually and cautiously reducing its bond buying program from its current rate of $ 120 billion per month.
The European Central Bank, however, is in a different position. As euro area growth accelerates, the level of budget support is not as strong as in the United States, and private sector recovery is not as advanced.
The hardest case to call is the UK. With more finely balanced growth, budget support and private sector outlook, it’s no wonder that two well-respected central bankers, Haldane and BOE Governor Andrew Bailey, found themselves on opposite sides of the debate this year. this month.
Other central bankers around the world may be tempted to think that they are just spectators in all of this. They are not. The Fed, ECB and BOE are systemically important: their actions often have significant spillover effects (both positive and negative) on the global economy. As such, central bankers elsewhere should conduct their own scenario analyzes and formulate appropriate response plans. There is nothing wrong with hoping that three systemically important central banks will arrive at their destinations smoothly. But the journey is far from over, and the risk of someone slipping is not insignificant.
Copyright: Project Syndicat, 2021
The author is President of Queens’ College at Cambridge University and former Chairman of the Global Development Council under former US President Barack Obama.