Int'l central bank officials debate limits of power
By Alister Bull, Reuters
September 3, 2012, 12:03 am TWN
JACKSON HOLE, Wyoming -- Central bankers who traveled to the wilds of Wyoming to figure out if more policy action was needed to curb stubbornly high unemployment heard powerful arguments on both sides of the debate, and leave with many questions unanswered.
Policymakers in Europe and the United States facing weak growth and painfully high unemployment are struggling with the issue of whether additional monetary stimulus could do more harm than good.
As the annual Jackson Hole gathering came to a close on Saturday and some of the world's most important central bankers headed back home, a former vice chairman of the U.S. Federal Reserve summed up the key issue confronting the prestigious policy retreat.
“What is holding the economy back? Why is it that we've had such incredibly accommodative monetary policy for so long (but) we've had so little growth? I think it remains a puzzle,” said Donald Kohn, who is now a senior fellow at the Brookings Institution think tank in Washington.
Fed Chairman Ben Bernanke, citing “grave” concerns about stagnation in the labor market in remarks that were seen as advancing the case for another round of bond purchases by the U.S. central bank, talked about headwinds obstructing a recovery that included the debt crisis in Europe and U.S. fiscal policy.
European Central Bank President Mario Draghi canceled his attendance at the conference to stay home to prepare for a meeting on Thursday, at which he may advance a controversial plan for the ECB to buy Spanish and Italian government bonds to win time for the region to tackle its festering debt crisis.
Adam Posen, who finished his final day as a member of the Bank of England's monetary policy on Friday and is a powerful advocate for more forceful central bank action, asked the same question as Kohn: “Why has all this lower short-term interest rates failed to make the economy go go go?”
But he scornfully blamed “defeatism” by central banks concerned about interfering in the proper functioning of markets and damaging their credibility. He argued that policymakers in Europe and the United States should waste no time in extending asset purchase programs to spur growth.
“The idea that this is somehow a pristine, virgin central bank that would be tainted forever by intervening ... is a prehistoric way of thinking,” he said.
A Reuters poll this week revealed a strong expectation that Draghi will expound on plans for the ECB to buy government debt to reduce crippling Spanish and Italian borrowing costs.
But the ECB is not likely to set a cap, or a defined level at which it will step into the market, on those yields, according the survey.
Economists were divided over whether the bank will cut its main refinancing rate from 0.75 percent to a record low of 0.5 percent next week. An October rate cut instead looked equally likely.
A Reuters Poll also found the Bank of England is likely to beef up its 375-billion-pound quantitative easing program with a final extra 50-billion-pound round of bond purchases — but not until November.