Echoes Dispatches From Economic History
As Fed Meets, Two Lessons from 30 Years at Jackson Hole: Echoes
The world’s financial leaders are again on their way to Jackson Hole, Wyoming, for what will be the 30th annual monetary-policy symposium in the Grand Teton Mountains. Anticipations are running high that Federal Reserve Chairman Ben S. Bernanke will say something in the opening address to move markets, like he did last year.
Some even attribute a stock-market rally this week to rumors that he will hint at new interventions, like a third round of “quantitative easing” or an “Operation Twist” to lengthen the maturity of the Fed’s Treasury portfolio.
I attended the first monetary-policy symposium in August 1982, and I plan to be there for the 30th meeting this week. I expect that the Tetons will still be there, but virtually everything else will be different. And there are lessons in those differences.
Paul Volcker chaired the Federal Reserve Board back then. He came to the symposium, but he was not on the program to give the opening address, so no one was speculating on what he might say. The conference was only half its current size in 1982. No other Fed governors were there, nor governors of any foreign central banks, and certainly no one representing an emerging market. In contrast, this week more than 40 foreign central bankers will likely come, of which about half will be governors from emerging markets. Only four financial journalists came in 1982 -- William J. Eaton of the Los Angeles Times, Jonathan Fuerbringer of the New York Times, Ken Bacon of the Wall Street Journal and John Berry of the Washington Post -- and there were no television people, compared to the scores we have now.
The economy was a mess in August 1982, though a different kind of mess than today. Largely because of those economic woes, a Gallup poll showed an approval rating of only 42 percent for President Ronald Reagan. President Barack Obama's rating now is even lower, at 38 percent. Interest rates were still very high in 1982: 30-year fixed mortgages were at 16 percent, compared to 4.2 percent now, and the federal-funds rate was over 10 percent. The unemployment rate was 9.8 percent and still rising; it would reach a peak of 10.8 percent in November, the trough of that very deep recession.
As I recall the 1982 meeting, it was clear to everyone that Volcker had a policy strategy in place: it was to focus on price stability, despite high and rising unemployment, and thereby get the inflation rate down. This would then restore economic stability and sustainable growth, create jobs and eventually reduce unemployment. The inflation rate had already been cut in half, to 6.2 percent at the time of the meeting from 13.5 percent in 1980.
So Volcker didn't need to use Jackson Hole to announce a new policy intervention. It was clear that he had a strategy. Some at the meeting, such as Nobel Laureate James Tobin, didn't like Volcker's strategy, but others did: for example, my contribution at the conference was to present a framework to explain the benefits of such a strategy, which could also be used to guide monetary policy in a world of price stability, which would come later.
Therein lies the first lesson: The Fed should come to Jackson Hole with a clear strategy that people know and understand, so there’s no need to make a volatility-inducing speech with hints about the next new intervention. This is difficult now, of course, with sharp disagreements within the Fed, but setting a course toward clearer strategy and less intervention would reduce policy uncertainty, which is already very high. And the Fed could still honor the tradition, which began under Alan Greenspan, of having the chairman give formal opening remarks: there are other good topics to talk about besides new interventions.
A second lesson is to listen carefully to the central bank governors from emerging-market countries that were not even represented in 1982. Agustin Carstens, governor of the Bank of Mexico, has a clear strategy for monetary policy. As he says, it is simply one of “monetary policy pursuing price stability,” adding that Mexicans are fortunate to have “a prudent fiscal policy” with few interventions.
The result is a strong Mexican economy despite the troubles of its trading partner to the north and the devastation wrought by the drug war. Mexico has an unemployment rate of 5.4 percent compared with 9.1 percent in the U.S. While struggling policy makers in the U.S., Europe and Japan chose not to pick Carstens to lead the International Monetary Fund, he and many of his colleagues in the emerging-market world are well worth listening to at Jackson Hole this week.
(John B. Taylor, a contributor to the Echoes blog, is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution.)
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