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The Real Stakes at Jackson Hole This Year

With inflation at a 40-year high in many countries, central bankers and businesses are understandably focused on the question of what monetary policy should look like in the near term. But they must not let that distract them from bigger issues stemming from the balkanization of the global economy.

JACKSON HOLE, WYOMING – This week, I am attending the US Federal Reserve Bank of Kansas City’s annual meeting alongside US Federal Reserve Chair Jerome Powell and other central bankers, policymakers, and economists. This year’s gathering – the first to take place in-person since the pandemic – is unfolding against a backdrop of weak global prospects, widespread recession fears, and threats of ever-higher inflation. The Fed will doubtless seek to reassert its credibility as a serious inflation fighter. But because the surge in prices is being driven by such a wide variety of factors, the effectiveness of monetary policy may be limited.

For example, massive levels of quantitative easing (central-bank asset purchases), multiple rounds of stimulus checks from the government to households, and an environment of persistently low interest rates (dating back to the 2008 financial crisis) have intensified the post-COVID bump in aggregate demand for tradeable goods and services. And asset appreciation – especially in real estate and stock portfolios – has spawned additional wealth effects, stimulating consumption by people who have come to feel richer.

Conventional monetary-policy tightening is largely about demand destruction. When a central bank raises interest rates and reduces the money supply by curtailing its monthly asset purchases, these measures should quash – or at least curb the growth of – aggregate demand.

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