Maybe central banks aren’t quite so powerful after all.
Might we be overestimating their ability to bring inflation back to their target, typically 2%, at least in the near term? They’ve been chastised for that failure, but the admonishment could be wide of the mark.
Perhaps inflation should be given longer to climb?
Should monetary policy pay more attention to financial conditions and stability? (Hard to argue with that, given the debacle of 2007-2008.)
More fundamentally, could policy makers be hostage to powerful trends built up over decades — like technological innovations and an increasingly global economy? These forces have little to do with where the Federal Reserve, the European Central Bank or the Bank of Japan set their benchmark rates.
These are among the issues probed by Claudio Borio, a top official at the Bank for International Settlements, a kind of central bank for central banks. In a speech Friday, Borio said he would be deliberately provocative; he didn’t disappoint.
It’s a timely and significant contribution to the intensifying debate about why, eight years into a global expansion with unemployment very low, inflation and wages just aren’t firing.
The scrutiny of policy was on full display this week when Fed Chair Janet Yellen acknowledged it’s a bit of a mystery why inflation is not only stuck below target, but going the wrong way: south.