Monetary policy in a new economic and geopolitical landscape

Charles Evans and Luis de Guindos

On 3 October 2019, the Rafael del Pino Foundation, the Global Interdependence Center and BBVA organised the meeting "Monetary policy in a new economic and geopolitical scenario" with the participation of Charles Evans and Luis de Guindos, moderated by Rafael Repullo.

Charles Evans is the ninth President and Chief Executive Officer of the Federal Reserve Bank of Chicago and a voting member of the Federal Open Market Committee. Prior to becoming President of the Federal Open Market Committee, he was Senior Vice President of the Federal Reserve Bank of Chicago, where he was involved in the supervision of the system's institutions and in the analysis of monetary policy, financial markets and the regional economy. Charles Evans received a BA in economics from the University of Virginia and a PhD in economics from Carnegie-Mellon University. He has taught at the universities of Chicago, Michigan and South Carolina and has published his academic research in prestigious journals such as the Journal of Political Economy, the American Economic Review, the Journal of Monetary Economics, the Quarterly Journal of Economics and the Handbook of Macroeconomics.

Luis de Guindos Jurado is Vice-President of the European Central Bank. He was Minister of Economy, Industry and Competitiveness of the Spanish Government between 2016 and 2018. In the 10th Legislature he was Minister of Economy and Competitiveness and from 15 April 2016 he took over the affairs of the Ministry of Industry, Energy and Tourism following the resignation of his predecessor, José Manuel Soria (but without taking over the Ministry). He belongs to the Cuerpo Superior de Técnicos Comerciales y Economistas del Estado, where he held various positions. He has worked in financial services companies and was a member of the advisory board of Lehman Brothers at European level and director in Spain and Portugal until its bankruptcy in 2008. He has been director of the Instituto de Empresa since 20102 and was a member of the Board of Directors of Endesa as an independent external director.


On 3 October 2019, the Rafael del Pino Foundation hosted a dialogue between Charles Evans, President of the Chicago Federal Reserve, and Luis de Guindos, Vice-President of the European Central Bank, on monetary policy in a new economic and political scenario. The event, which was part of the 2019 Central Banking Series, began with a speech by Charles Evans, who spoke about the economic situation in the United States and its implications for monetary policy. Economic fundamentals still remain good. Consumption remains strong, thanks to a vibrant labour market and very low levels of unemployment at all income levels, including for low-skilled workers. Rather, the slowdown in the US is occurring on the business side, with negative investment in capital goods, due to uncertainties related to international trade, in particular the trade negotiations with China. In this context, it is noteworthy that the growth forecast for the US in 2019 is 2.251GDP3T and an average of 21GDP3T for the next eighteen months. The most worrying aspect is inflation, which continues to grow below the 2% target. Monetary policy is changing direction from what it was until 2018. Then, there were two focal points. The first was an international economy that was growing strongly, while in the US there was the expectation of fiscal stimulus through tax reform. Those who designed it believed that the US could afford to run up the public debt. Moreover, Congress agreed to increase government spending, which would provide additional fiscal stimulus to the economy. This, moreover, would take place against a backdrop of deregulation of the economy. As a result, the economy continued to grow and unemployment fell to levels below the trend estimated by the Federal Reserve. Inflation, in turn, appeared to be moving towards the 2% target. In this context, it seemed logical for the Federal Reserve to consider withdrawing monetary stimulus and to start raising interest rates. The question was whether this withdrawal should be gradual and how far to go in normalising monetary policy. The other focus of attention was on inflation, which seemed to be rising towards the 2% target. The question was whether this trend was sustainable, as there was already a risk of an overreaction in price increases. Low levels of unemployment seemed to support that prospect. But the price changes being brought about by the digital revolution seem to be easing those inflationary pressures, which raised the question of how restrictive monetary policy should be. So my view was that monetary policy had to go a little bit beyond its cycle and put the interest rate slightly above the equilibrium interest rate, say fifty basis points. This is not a very tight monetary policy. Thereafter, the Fed started to raise interest rates and, despite this, fundamentals were still strong. At that time, however, uncertainties associated with trade negotiations began to emerge, which affected business expectations, and companies began to reduce their spending on capital goods. In view of these changed circumstances, together with the fact that inflation remained below the 2% target, the Federal Reserve decided in the middle of this year to cut interest rates. Monetary policy thus became slightly accommodative, with the interest rate set at 50 basis points below the equilibrium rate. This mid-cycle adjustment can be fully justified by the inflation data. The Fed is, of course, concerned about economic headwinds, but what matters in this case is that inflation remains persistently below the 2% target, which is the real concern. Such an adjustment helps businesses and consumers to adjust to the current state of the US economy. Luis de Guindos, for his part, referred to the situation in the Eurozone. It has taken nine years for the Eurozone economy to recover the level of per capita income it had in 2007. At the same time, inflation has remained consistently below the ECB's target during that period. In those years, the ECB acted decisively to support demand in the euro area and to bring inflation up to a more sustainable path in line with the 2% medium-term objective. This included lowering interest rates to historically low levels and adopting a wide range of unconventional monetary policy measures. With recent economic data now pointing to more protracted weakness, the ECB adopted a package of measures aimed at supporting the expansion of the euro area and promoting the convergence of inflation rates with the bank's medium-term objective. The ECB also appreciated the need for countries with room in their public finances to act in an effective and timely manner and for all countries to increase their efforts to achieve a composition of their public finances more supportive of economic growth. From the ECB's perspective, fiscal policy is currently only mildly expansionary at the aggregate level. The current institutional framework, however, is insufficient to generate the required stimulus. Although we are in an economic and monetary union, fiscal policy remains a national responsibility, albeit with some common rules for individual countries contained in the Stability Pact. The Stability Pact has limited the flexibility of fiscal policy and has not been adapted to incorporate euro area-wide stabilisation elements because the fiscal rules focus only on national issues. A euro area budget would not interfere with domestic policies. By focusing on euro area-wide stabilisation it would not affect national fiscal space, but would provide an additional layer. This would help to avoid cuts in expenditure items that are vital for long-term growth, thereby preserving fiscal room for manoeuvre going forward and supporting long-term real interest rate stability. Such a fiscal union would have to be carefully designed to avoid, or mitigate, moral hazard. But it should have sufficient firepower to be able to contribute effectively to macroeconomic stabilisation. That is, it must be large enough and agile enough to react quickly to emerging threats. However, macroeconomic stabilisation in the euro area can only work well if other features and institutions of the euro area are properly and operationally designed. This requires completing the banking union with a European deposit guarantee fund and stronger fiscal backing for the Single Resolution Mechanism. In addition, it is imperative to accelerate progress towards the capital markets union, which implies aligning key elements of national policies, such as taxation and insolvency regimes, which are essential for integrating the legal aspects of cross-border markets.

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.