Monetary policy in a new economic scenario

Summary:

On 27 March 2017, the Rafael del Pino Foundation hosted the annual edition of the Central Bank Series, this time focusing on monetary policy in a new economic scenario. The session was attended by Charles Evans, President of the Chicago Federal Reserve; Peter Praet, member of the Steering Committee of the European Central Bank; and Jaime Caruana, President of the Bank for International Settlements. The first speaker was Charles Evans, who noted that inflation in the United States is on track to meet the Federal Reserve's 2% target, although he is concerned that longer-term inflationary expectations are still below that target. In his view, macroeconomic fundamentals are strengthening. Employment is growing strongly, as are consumer confidence and private consumption. Only investment shows a somewhat disappointing performance. However, uncertainty remains high, higher than in the aftermath of other economic crises. In this respect, he pointed to the economic slowdown in China. In this context, growth expectations for the US economy remained lower than many would like, although the country has room to cut corporate taxes, which would allow for some improvement in these expectations. The problem is that long-term expectations also remain lower as a result of demographics and technological change. In his view, the US needs higher rates of productivity growth as the labour force shrinks. On the monetary policy front, Evans said that two more interest rate hikes this year would be appropriate to strengthen the US economy, and he said that rate hikes are also expected in 2018 and 2019. Praet, in turn, began his speech by indicating that the euro area was not prepared to deal with the collapse of large banking institutions that occurred at the beginning of the crisis, a period in which events unfolded at great speed. In this context, monetary policy had to play a key role, although the actions taken by the European Central Bank would not have been successful without other support. Now, however, the euro area has a new, albeit still incomplete, institutional framework to deal with this type of problem. However, monetary policy does not lead to balanced budgets. This is where countries have to act to redress the situation. The same applies to the structural reforms needed in some member countries of the European Monetary Union. In the euro area, the risks are diminishing, although there is a danger that the process of structural reforms will slow down. The economy is recovering, although the capital stock is still low. And an added problem is that some countries are concerned about price stability because of the low interest rates maintained by the European Central Bank. Jaime Caruana, the last to speak, stressed that the main challenge for central banks at the moment is how to make the transition towards the normalisation of monetary policy. In this respect, he indicated that everything related to financial stability should be much better integrated into the monetary policy framework than it has been in the past. He also recalled that the experience of quantitative easing has its limits and there may be a risk of over-easing. He also said that central banks need to better incorporate their interactions with the rest of the world. Regarding the current juncture, Caruana believes that there is not going to be much globalisation, due to political uncertainties and the rise of protectionism. Moreover, financial cycles are returning to emerging markets. Monetary policy normalisation must take these aspects into account. He also referred to the limits of monetary policy, which are to be found in excessive levels of public debt and problems related to financial systems. Still, if central banks had not intervened during the crisis, we would have been facing a major recession. But it should be borne in mind that rapid credit growth influences the real growth of economies and productivity developments. The transition towards monetary policy normalisation faces the problem of asymmetry in dealing with financial cycles. It is therefore important that the process, which has already started, be gradual as well as steady. The best approach in this respect would be a policy mix, rather than placing so much of the burden on monetary policy, which should include elements related to potential financial stability-related shocks.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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