Paradigm shift central3/31/2023 ![]() Stanford economist Taylor, whose eponymous rule is used by many central banks to estimate how interest rates should respond to changes in the economy, has argued for the Fed to tie itself to stricter policy guidelines that would be published in detail, decreasing its capability to enact ad-hoc changes. Jerome Powell, John Taylor, Gary Cohn and Yellen herself are all said to be still in the running, and while Warsh's stance has been dismissed by some analysts as self-promoting hyperbole, he is not alone in thinking central banks will need a new policy framework going forward. ![]() He wants FOMC members to be happy for policy to "lean against the wind" and to be less reactive to data and market movements. Warsh, who was a governor on the Federal Open Market Committee between 20, toward the end of which time he voiced criticism of then-Chair Ben Bernanke's second round of QE, has advocated a softer focus on the target of 2% inflation, arguing instead for a "comfort zone" of around 2%. ![]() Kevin Warsh, one of the front-runners to succeed Janet Yellen as Fed chair in February 2018, has attacked what he sees as "groupthink" from global central banks post-crisis, and in a speech in June 2016 called for a "new paradigm" for monetary policy. economy's advanced position in the post-crisis cycle means the next Fed chair may well set the tone for "post-QE" monetary policy. "This - and hopefully the dawning realization that, by prolonging liquidity injections and ultralow rates, central banks may now be contributing to the problem - suggest newcomers may offer alternative paradigms."Īs the custodian of the world's top reserve currency the Fed has an unequivocally global role, and the U.S. "The frustration for all G7 central banks is that recoveries since 2009 have mainly been output-driven, and with output gaps slow to close and wage pressure still capped, they've yet to generate enough inflation to trigger central banks' usual reaction functions," said Neil Williams, chief economist at Hermes Investment Management. ![]() The Fed, the Bank of Japan, the European Central Bank and the People's Bank of China may all have new bosses by 2019, which along with personnel changes at the Bank of England will lead to the departure of the generation of central bankers who steered the global economy through the crisis with an unprecedented era of easy money.ĭespite the return of economic growth and tumbling unemployment, ultralow rates and trillions of dollars' worth of quantitative easing, or QE, have failed to push inflation back towards central banks' targets, raising the possibility that their conventional monetary policy tools are inadequate and some of their models broken. Central bankers are being forced to challenge their own conventional wisdom on the interplay between rates and inflation, and the next chair of the Federal Reserve will have a big say in what any new policy paradigm may look like.
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