By Carl Tannenbaum

Next week, the Federal Reserve will host its annual conference in Jackson Hole, Wyoming. The Chairman’s keynote address is always highly anticipated.  If I had a chance to take the podium, this is what I would say. 

It is a pleasure to address this conference, which brings together experts from a wide range of countries, backgrounds, and institutions.  I am looking forward to the discussions which will take place in the days ahead.

The title of this Symposium, “Reassessing the Effectiveness and Transmission of Monetary Policy” is particularly appropriate.  We are gathered during a transition phase for policy and in the wake of a period of market instability.  I will attempt to place recent developments into perspective, and offer thoughts on what might lie ahead.

Central bankers have customarily taken a long view in their deliberations.  This posture is informed by three things.  Firstly, their mandates cover long terms: price stability and (in the case of the United States) maximum employment are to be achieved sustainably.  Secondly, monetary policy works with long and variable lags, requiring a view of the horizon from the shore.  And lastly, the information on which they rely for guidance can often be volatile, and must be considered over an appropriate interval.

The U.S. employment situation offers a case study on this latter front.  Over the past year, the American labor market has performed very well.  Unemployment remains low by historical standards, in spite of a record influx of immigration.  We’ve created an average of 200,000 jobs per month this year, consistent with updated estimates of available labor.

Joblessness is higher than it was at this time last year, and those who have been displaced are in transition.  I don’t mean to minimize the challenges faced by their households. But the extraordinarily low level of unemployment was not sustainable, at least not in a manner consistent with a commitment to control the price level.

Labor markets can experience significant discontinuities: trickles of deterioration are often followed by more significant flows.  Risks have increased, and we should watch incoming data closely.

Overall economic activity continues to progress at a solid rate.  Real growth advanced at a 2.8% pace in the second quarter, and has consistently defied predictions of recession over the last two years.  The consensus among forecasters calls for sustained growth as we move into 2025.

Inflation is edging down.  The Fed’s preferred measure stands at 2.6% over the past twelve months; core consumer prices are up by about 3% over the same interval.  We are beginning to see some easing in the escalation of shelter and service prices, which will be essential to reaching the 2% target.  With some distance to travel before we get there, caution is still warranted.

These conditions should allow monetary policy to return to more normal levels at a measured pace.  As always, the Fed should monitor developments and move with additional urgency should conditions warrant. 

Let me close by offering reflections on the market unrest that occurred earlier this month.  The Federal Reserve, among other central banks, has consistently raised concerns about leveraged transactions that can exaggerate market movements.  The “carry trades” which unwound in the wake of decisions taken by the Bank of Japan had implications across a range of asset classes.

Monetary policy cannot, and should not seek to stabilize asset prices.  Attempts to do so create substantial moral hazard and have little guarantee of success.  Intervention is only warranted when market events create consequences for the real economy; there is no evidence that the recent episode will have such an impact.  Financial conditions remain on the easy side.

The week of August 5 does, however, highlight the importance of additional surveillance into cross-currency and cross-market positioning. The Fed should seek additional insight into this space through its financial stability division and through its supervision of the banking system.

The post-pandemic era has certainly raised questions about the effectiveness and transmission of monetary policy.  We have answered some of these, but the search for additional insight continues.