It will be a tough one to avoid. Federal Reserve Chairman Ben Bernanke’s absence from Jackson Hole is just one in a series of strong hints he will step down at the end of his second term in January. So, it is only natural that a lot of the talk on the sidelines of this year’s conference will inevitably revolve around the issue of his replacement.
But there is another, potentially more important question that needs to be answered in the shadow of Wyoming’s majestic Grand Teton peaks: Why have top U.S. Fed officials, even dovish ones, become increasingly queasy about asset purchases despite falling inflation?
Thus far, policymakers have discussed the prospect of a reduction in the pace of their bond-buying stimulus in terms of an improvement in the economy and the prospect of an even brighter outlook toward year-end and in 2014. Yet the U.S. economy, while outpacing its even more anemic rich-nation counterparts, is hardly besieged by runaway growth of the sort that would normally lead central banks to tighten monetary policy. And by even talking about reducing bond buys, the Fed has helped push interest rates up more than a full percentage point, to a two year high, in just a few months.
There are a number of possible explanations, and the reality likely combines some element of each. One, sadly, is politics. As much as the central bank likes to tout its independence, policymakers were clearly caught off guard by the blowback, both in Congress and among the public, to unconventional monetary policy. The perception that the Fed was acting recklessly, even if erroneous, was relatively widespread, even among some respected voices in the economics community.
A second, likely more salient issue for Fed officials is the prospect that their asset purchases could adversely affect financial markets in some way. This could happen if the prolonged period of low rates stokes asset bubbles. This concern has prompted Kansas City Fed President Esther George to dissent against the Fed’s decisions so far this year to maintain stimulus levels steady. Jeremy Stein, an influential board governor who may have some intellectual sway with Bernanke and others, highlighted risk to financial stability from ongoing asset buys in a speech earlier this year.