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MIT Pours Salt Into Jackson Hole
Central Bank Mind and Hand Coordination
In MIT Pours Salt into Global Central Bank Liquidity, it was observed that the "Minds and Hands" of today's central bankers had been conditioned and coordinated at MIT. The meeting of these minds and hands at Jackson Hole, was another opportunity to observe this conditioned thinking translating into policy action.
Ben Bernanke used the Jackson Hole platform as an opportunity to defend the record of Quantitative Easing; and prepare the way for more of the same. His paper entitled Monetary Policy Since the Onset of the Crisis laid out the monetary history of the US economy since the crisis began. He credits Quantitative Easing with raising GDP by 3% and creating 2 million jobs. Following his train of thought; when he stated that economic performance currently was unacceptable, he was implying that there is room for more Quantitative Easing.
Taking Bernanke With a Big Pinch of Salt
The custodians of the Saltwater School for Minds and Hands appear to have taken issue with their alumnus. As far as MIT is concerned, the record of Quantitative Easing is not proven; and they suggest a far less equivocal policy tool instead. Michael Woodford of MIT was entrusted with the intellectual demolition job on Bernanke's QE; and the construction of its replacement. Woodford's paper entitled Methods of Policy Accommodation at the Interest-Rate Lower Bound was designed to follow on from Quantitative Easing, rather than to contradict and discredit it. Woodford presented evidence that gave Bernanke the benefit of the doubt; by suggesting that the benefits of Quantitative Easing were diluted by poor policy communication. In effect when Bernanke Quantitatively Eased, this was undone by policy communication that suggested tightening soon after. As a result, the Fed has expanded Reserves in the banking system, but these Reserves have remained there and not been multiplied throughout the economy. Woodford directly links this broken monetary transmission mechanism to the issue of communication. The banks and borrowers are confused about the intentions and capabilities of the Fed; therefore they don't lend or borrow respectively.
To rectify the matter, Woodoford suggested that Fed policy statements had a greater impact on interest rate expectations and the course of monetary policy. The impact of the Bank of Canada's policy statements were presented as evidence of how strong and clear communication could be achieved effectively.
The ideal communication strategy should also be linked to a stated policy aim that interest rates will remain low and policy will be loose until growth reaches its potential target. The Fed's Growth Mandate therefore is defined with a growth target.
Bernanke is currently defending the Growth Mandate, so having a stated growth target plays to his requirements.There is a dilemma however for Bernanke, because under his tenure and commitment to transparency Fed Governors have adopted the habit of making conflicting speeches simultaneously. Woodford is therefore implying that the Fed should speak with one voice; and that this voice should be Bernanke's. Once again, this suggestion plays to Bernanke's requirements.
It will be interesting to observe any changes in Fed communication policy; that signal the adoption or negation of the suggestions from MIT. The adoption of a specific growth target to go with their inflation target, would be the salty aftertaste from Jackson Hole.