There have been many, many, many reports and podcasts and descriptions and interpretations from the Fed’s Jackson Hole meeting. I want to mention just one interview.
Jacob Frenkel is an intellectual giant among the members of the community of international central bankers. In addition, he is also a fellow in the Global Interdependence Center’s College of Central Bankers. Here’s an excerpt from Kathleen Hays’ introduction of Frenkel: “Two-term governor of the Bank of Israel, ‘91–2000. Former professor of economics at the University of Chicago. That was in the ‘70s and ‘80s. Former International Monetary Fund chief economist and director of research. That was ’87 to ’91. Chairman of the Group of 30, 2001–2022, until they said, ‘Jacob, you’ve paid your dues. We’re going to make you Chairman Emeritus.’ And a chairman of J.P. Morgan International, 1999 to 2020.”
This wide-ranging interview is simply extraordinary. Frenkel explains his positions on the issues with exceptional clarity. Many are covered within the span of 30 minutes. We recommend readers take in the full half hour.
Here’s an excerpt.
JACOB FRENKEL:
Well, being behind the curve or not can only be judged after the event. There is no question, all the central banks of the world, most of them, have been somewhat behind the curve when the inflation was too low, and then somewhat behind the curve when the inflation was too high, because the argument was, we need to be data dependent, and data dependent almost built in, being behind the curve because until you see it in the data, you will not act. And I think this is a subtle important point. And I would interpret the right way to speak about data dependence is to speak about expected data dependence.
So the analysis of the central bank within the central banks, the research departments of the central bank, should be focused on what will be the outcome and the likely outcome of our actions, and we will act accordingly. So it is expectations that will lead the policies rather than the numbers themselves.
We have prepared a transcript for those readers who want to absorb the messages contained in the interview with a more thoughtful application of time. I am a regular subscriber to Kathleen Hays’ “Central Bank Central” substack series.
Now to the transcript.
KATHLEEN HAYS:
Welcome to Central Bank Central. I’m Kathleen Hayes here at the Jackson Lake Lodge in the shadow of the Grand Tetons. This is where the Federal Reserve Bank of Kansas City holds its annual economic symposium every year. It’s a symposium attended by central bankers, Federal Reserve officials around the world, the top economists, policymakers. But, you know, it wouldn’t be the Jackson Hole Symposium if it wasn’t for the guest who’s joining me now. I’d like to welcome, as I have many years, to join me for discussing all the big issues, and that’s Jacob Frenkel. Great to see you.
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JACOB FRENKEL:
Nice to be with you. Thank you.
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KATHLEEN HAYS:
Where we met years ago.
JACOB FRENKEL:
Great tradition.
KATHLEEN HAYS:
So let me just run through for everybody all the various aspects of your background, which makes you so perfect to discuss all the things we’re going to be talking about. Two-term governor of the Bank of Israel, ‘91 – 2000. Former professor of economics at the University of Chicago. That was in the ‘70s and ‘80s. A very esteemed economist if I might add. Former International Monetary Fund chief economist and director of research. That was ’87 to ’91. Chairman of the Group of 30, 2001 – 2022, until they said, “Jacob, you’ve paid your dues. We’re going to make you Chairman Emeritus. And a chairman of J.P. Morgan International, 1999 to 2020.”
Again, you have a lot of things you’ve done over the years, and you’ve worked with so many central bankers. You’ve been a central banker. So why don’t you start by telling us, Jacob, why is the Fed’s, Kansas City Fed, Jackson Hole Symposium, so important?
JACOB FRENKEL:
Well, just look around. You’ve got the answer in the question. This is the most fabulous place. It attracts people from all over the world. And in particular, this is a unique conference organized by the Federal Reserve, the largest central bank in the world and most important one, for the international group of central bankers.
This is in fact the only and main international activity and the biggest for central banks organized by the Fed. And I think the important part of it is the informality, the ability of people to interact, to learn how the other guy thinks. And it’s all in a very informal setting. It’s jeans. It’s not a tie. And it creates a camaraderie, which is helpful for the entire year. And in times of crisis, there is nothing more important than direct communications among central banks.
KATHLEEN HAYS:
So over the years, this event more and more took on the role of the Fed Chair, who kicks off the proceedings Friday when he officially opened, with some kind of speech. Could just be a little bit about the economy, but more and more this was the place the Fed Chair waited to deliver a strong message.
What do you have to say about that for the first part of the question, and what do you have to say about what Jay Powell messaged to the world today?
JACOB FRENKEL:
Well, indeed, those are two distinct issues, and they are very important. And in his opening speech today, Jay Powell was extremely explicit. You know, there was a period with former chairman of the Federal Reserve that obscurity was the name of the game. And you came out of the room trying to guess, what did he really say?
And you know, this was true for Volcker’s period. This was true for Greenspan’s period, and so on. I must say, with Jay Powell, what you see is what you get, and what you hear is what you get. Very explicit. We have had a tough period in the world financial system. It was subject to major shocks, unprecedented ones.
And even if we just, we are not talking even about the great financial shock crisis that we have had, but we have had, most recently, COVID and its aftermath, the war between the Ukraine with Russia’s invasion that have impacted the world economy tremendously, and it became global, a great challenge to central banks.
And I think that we are now, and basically Jay Powell almost announced it, we have turned the corner. But turned the corner in a fundamental sense. He said, you know, we have tightened the economy in order to fight inflation. We have made great progress, and we are almost ready to go.
When I say almost ready to go, I believe we are now in the second part of August. In the second part of September, there is going to be a Fed meeting, and I will be very surprised if they will not deliver on the hint, namely interest rates are going to start going down. Although I must say, Jay Powell was very careful, as he always is, saying it will be data dependent and we will need to see if we have some new information. But other than surprises, which can always come, I think that we should assume that the Fed is now on the road for easing.
And I think the markets have responded very favorably and, I believe appropriately.
KATHLEEN HAYS:
So, do you get the sense that they have a dual mandate, that Powell doesn’t seem worried about the inflation side of the mandate? It’s moving in the right direction. It’s time to start adjusting rates. On the other hand, “oh, if unemployment goes any higher”. It seems that he’s saying that, yeah, we’ve got a dual mandate, but the important part that’s going to make the difference of, what if they wouldn’t cut in September? Oh, payrolls go up $250,000, unemployment comes down. That’s the key factor now.
JACOB FRENKEL:
Well, this business with a dual mandate is a very subtle one because the main objective of the central bank is and has been to secure price stability. There is an issue, of course, how do you secure economic growth and prosperity. And each central bank, and I should say even each chairman of the Fed, sees and interprets it somewhat differently. It’s very nuanced. For example, during Volcker’s era, you heard very little about the so-called duale mandate, price stability, and economic growth or employment. And when you asked Volcker, what about economic growth? What should the Fed do about it? Don’t you have a dual mandate?
His answer, whether explicitly or implicitly, was very concrete. He said, in order to secure economic growth, the best contribution that the central bank can make is to secure price stability. And the tools to bring about price stability is in my possession, and the mandate to bring it about is in my capability. So I interpret the dual mandate as basically going through price stability. I should say, in the past few years, most central banks have also added a third dimension, and in some it was part of the rules of operation. And in some it was even within the formal legislation, namely the role of financial stability because the financial stability has become much more prominent in the objectives of central banks.
KATHLEEN HAYS:
So one more specific question. Is it your sense that this is a Fed that’s going to move more cautiously, maybe, than markets expect, that it’s not going to go boom, boom, boom, 25, 50, 50, or something like that, but it’s going to be cut the rate, see what happens, cut the rate, see what happens? And if you were sitting in that chair, what would you be doing as a central banker?
JACOB FRENKEL:
So, you’re asking two questions.
KATHLEEN HAYS:
As always (laughs)
JACOB FRENKEL:
First of all, to make sure that we clarify: boom, boom, boom should not be in the language of central banks. Central banks should be step, step, step. And you know, the situation is so uncertain. And there is so much darkness and clouds that there is a dictum.
You don’t run fast into a dark room. So unless, in order to eliminate the darkness, you either have to walk slowly or you have to turn on the light. And I think that what the Fed has been doing is both. They will go step by step, not boom, boom, boom. But they will also turn on the light in the sense of being more explicit about communications with the markets, so there will be less surprises.
KATHLEEN HAYS:
Is the Fed behind the curve right now? Does it have a catch up? Is it kind of right on the curve where it should be?
JACOB FRENKEL:
Well, being behind the curve or not can only be judged after the event. There is no question, all the central banks of the world, most of them, have been somewhat behind the curve when the inflation was too low, and then somewhat behind the curve when the inflation was too high, because the argument was, we need to be data dependent, and data dependent almost built in, being behind the curve because until you see it in the data, you will not act. And I think this is a subtle important point. And I would interpret the right way to speak about data dependence is to speak about expected data dependence.
So the analysis of the central bank within the central banks, the research departments of the central bank, should be focused on what will be the outcome and the likely outcome of our actions, and we will act accordingly. So it is expectations that will lead the policies rather than the numbers themselves.
KATHLEEN HAYS:
So, I think you’re touching on something also subtle. Data dependence, obviously you have to see what the economy is doing, inflation is doing. But if you have to wait for every report, okay, I guess we can move. Does that also make you a little less preemptive potentially?
JACOB FRENKEL:
Maybe. But that’s why the discussion and most of the central banks realize that what they need to worry about is not the next month or the next week. It should be the path in the medium term. Monetary policy objectives should be cast in the medium term, tolerating some short-term deviations to be right or to the left, as long as it is anchoring the expectations to price stability in the medium term.
KATHLEEN HAYS:
You know, and Jay Powell had a mea culpa about moving too slow. How does that fit into what you just said? He’s admitting that the Fed was – They’ve gotten where they need to get now. He didn’t exactly apologize, but he did say that transitory, overcrowded boat was part of the problem. They bet on that too long.
JACOB FRENKEL:
Well, you know, again, something which is after the event. Although I personally believe that the distinction between transitory and permanent is putting the weight on something which is not so precise. Why? You know, market participants, when they see outcomes, they say, well, is it temporary or not? But policymakers should define their role in making sure that their policies are such that shocks that would have been permanent become transitory. So in other words, the anticipatory part of policymaking is key. And again, it brings me to the expectations. You work on what you believe is in the future.
Now, I should say, it’s not the Federal Reserve only. This has been the situation and we need to recognize it throughout the financial markets, throughout the previous years we have faced unprecedented set of shocks and by and large I would say central banks and definitely in comparison with fiscal authorities and governments, central banks have been very responsible and, in a way, they saved the day.
KATHLEEN HAYS:
So I want to mention the Taylor Rule. John Taylor, someone you know very well over the years, Stanford, Hoover, the Taylor Rule looks at growth, it looks at inflation, and it comes up to an approximation of roughly where the Fed’s key rate, in this case the Fed funds rate, where it should be.
John right now is looking to four to four-and-a-half as the appropriate rule. Down from 5.3, that’ll be several rate cuts. We don’t know what that’s going to end up being. You can comment on that if you want. But I mostly want to ask you – This rule is under fire. People, for a few years now, and some increasingly say, well, first of all, why a 2% inflation target for the US? Where did that come from? Why not a point in the middle of a range? Do we need that at all? And in fact, Greenspan used to say price stability. He never had a target. It was enough just to say, we want to get to the point where the level of the key rate doesn’t make people get too optimistic and want to spend and invest and buy like crazy or too pessimistic and want to pull back.
JACOB FRENKEL:
Right. Okay. Again, as typical, I even counted more, but that’s perfectly fine. John Taylor. First of all, I should say I’m a little biased because we are very good friends and I respect him immensely. And he has made consistent contributions to economic stability through his analysis. Having said this, the Taylor Rule is a rule that is making more explicit the idea of we are aiming at price stability, but if we recognize that there is a significant gap between the state of the economy that is reflecting, say, full employment and where we are now, we will adjust our policy rate in order to correct it in a way, but by and large, we are focusing on price stability in the medium term. The important thing, I think, that in my lessons from John Taylor is sticking to rules. He taught us, and I think rightly so, that economic policy should be based on long-term trajectory, not to be a kind of a volatility, but sticking by the rules, defining the objectives in the medium term. And that’s where the fine-tuning element, which is so tempting, should be resisted. Now, in terms of the question about inflation targeting, I think that, indeed, inflation targets, we have used it in Israel a lot, and I’ve used it in order to stabilize the economy..
KATHLEEN HAYS:
I’ll just inject here that Jacob had the Bank of Israel in 1991. You were in the vanguard of launching inflation targets in the world.
JACOB FRENKEL:
Well, thank you for reminding me, which is the case because the idea of inflation targeting for countries that have suffered from high inflation is that it is a very efficient rule to stabilize, to lower. Remember, we get into a stabilization program with a great deficit of credibility. You cannot even rely on promises because you don’t have credibility. Nobody will believe you. So therefore, we need to be very explicit. This is the inflation target. You inform the markets that that’s what you mean. You are accountable. There is a referendum on your performance on a daily, monthly, yearly basis, and you, such a way, you travel gradually towards price stability. Of course, because we are not sharpshooters, we should not make the inflation target a single number. Because then it means the probability of instead of 3.0, it is 3.1 or 2.9. It’s a drama. We all recognize we want to have the vicinity of where we have. Most central banks have defined the vicinity of price stability to be around 2%.
The European Central Bank speaks about 2%, a little bit below maybe, or a bit below. Some others have had a range and I believe that range is important, say between 1.5% and 2.5%, if that’s what you mean, 2%.
The reason is that you do not want every deviation from what will happen to destroy your credibility, to force you to undertake a stop-go policy to be too dramatic. We need to do things very gradually, and that’s the reason why soft landing is so important. When you fly on a plane, you really hope it will be a soft landing. It is not coming crashing to the ground. And that’s why the range is important, especially in periods where there are so many changes in the structure of the economy.
KATHLEEN HAYS:
You know, this is so important right now. Because one of the things I wanted to ask you is, well, you know, Jacob, the Fed’s going to start cutting rates when inflation is around 2.6%, the target’s 2%. But presumably, you would say, well, Kathleen, the headline’s at 2.5% and the core’s at 2.6%. And if we had a range for the Fed right now, it’d probably be 1.5% to 2.5%. So, hey, there’s just right at the top of the range now. Is that what you would look at this?
JACOB FRENKEL:
Yeah, but if you look at the price component of the objectives of the Fed, then we need to ask, where are we in the real economy, in the labor market? And I would also add, even though it’s not part specifically of the mandate, I would ask, where are we in the financial stability objective? Some countries have it explicitly in the mandate.
KATHLEEN HAYS:
Can I just interrupt you for a second? For people who are watching you, and they’re in a trance, explain financial stability. How do you define that? What that means for a central bank. You’re right, there’s a dual mandate, but financial stability and avoiding financial crises, it has its own role. There are two big ones, and there’s a dual mandate, and then there’s a financial one.
JACOB FRENKEL:
We have learned in the hard way that most of the real crises that affected not just inflation but the entire financial system, the banking system, and therefore affecting the population in a dramatic way, the mortgage markets get dry and all of that, many of those, the debt crisis, many of those emanated from the financial sector. That’s why it’s so important that bank supervisors are very, very strong, ensuring that banks do not go under, that bank regulators are making sure that the banking sector is abiding by the rules. And what happened in the past few years was again a drama.
Much of the banking activities do not take place only within banks. It goes through very other type of companies and institutions. And that’s a challenge. That’s why it’s like in a package which is fragile. It’s handled with care. The financial sector is very sensitive to messages. It reacts quickly. You do not need to wait for the cargo ships to unload their cargo, for the goods to pass the borders. It’s enough that people expect things to happen, and they work on their laptop, and immediately things are transmitted immediately. So in other words, speed is of the essence. And therefore, when speed is of the essence, you need to make sure that you are capable of addressing things that are coming fast.
KATHLEEN HAYS:
Globally, Fed, now it looks like the first rate’s coming in September. The ECB ahead, European Central Bank, ahead of the Fed. People, oh look at that, Bank of Canada was early. There’s some other central banks that have cut already. Emerging markets, some could argue are a little more constrained because frequently, for example, you could..
I don’t want to name South Asian nations who, when they start, if they cut rates, their currency moves, capital moves. It’s one of the things I have to deal with. Latin American nations, not that their policy is wrong, but investors are always wary, right? So Fed starts cutting. What does that mean for the rest of the world? What does it mean for the Europeans, for the British? And what does it mean for the emerging market nations that have a.. They always have this other, what I would say, dimension that they have to look at when they’re thinking about moving rates.
JACOB FRENKEL:
Again, several points. Number one, you are absolutely right by emphasizing the fact that we have interdependence in the world. When somebody sneezes, the other one gets pneumonia. And that’s why we need to watch what is happening in the rest of the world and what’s the impact of what we do on the rest of the world.
This was the rationale that led the U.S. at the time to discuss policy coordination during the debt crisis of Latin America, and in the International Monetary Fund also putting around the table of the executive board, representatives of all the countries. It’s universal institutions because the impacts of policies are spreading themselves. But you mentioned emerging markets.
We need to emphasize that there was a fundamental sea change in this. There was a period when I was in the IMF years ago and the debt crisis was there. The culprit, the problems were Latin America. Where there is a problem, it’s Latin America or emerging markets. Where there is poverty, it’s Africa, etc.
I think that the financial crisis and the great financial crisis that happened in the previous years has taught us that, especially taught the emerging markets in Latin America, a very important lesson. And indeed now, with the current situation where there was the crisis of the COVID and all of this, they were ahead of the game.
They were ahead of the game, and in fact, they taught a lesson to the industrial countries that there is a way to do it, and it’s not any more a stigma to be in emerging markets or in developing countries. So there is universality. Well, should the Fed take into account its impact on the rest of the world? I don’t believe that the rest of the world should have a seat in the open market committee. But clearly, the discussion of the effect of what the Fed is doing on the world and its feedback, spillover and spillbacks, are part of the discussion.
And to the extent that it’s not fully part, it should be part of the discussion.
KATHLEEN HAYS:
I want to move to another part of the world, Israel, a wealthy developed nation, very strong central bank, mired in conflict with Hamas for nearly a year now. The part I want to ask you about, you’re the head of the central bank. How do you look at your inflation, your growth? How do you look at all the things when you’re in this fragility, conflict and violent world now that you weren’t in? What has this meant for Israel? What does it mean more broadly?
JACOB FRENKEL:
Well, I will focus really on the economy and I can say two things. We have had, unfortunately, quite a few hostile events during the past years. An extraordinary phenomenon that characterizes the response in Israel has been that once the hostility ceased, the recovery was extremely quickly and in a way returning to the path.
I must also say that Israel is very fortunate to have today a governor of the central bank, Professor Amir Yaron, who is highly professional, highly respected, and I think that this front, at least, is covered. We have enough travels otherwise. Why am I optimistic for the medium term? Of course there must be a resolution to the political issue, but I’m optimistic to the medium term because the jewel in the crown of the Israeli economy has been innovation, high-tech and in a way, human capital. And that human capital is there. The technology is there. The markets are abroad. And once the hostilities cease, this will resume again.
In the past, just before the war, more than 50 percent of Israeli export, significant part, came from the high-tech. A significant part of Israeli employment came from the high-tech. Significant part of tax revenues came from the high-tech. So it is in this regard that I am still very optimistic.
I must say, however, that the situation now is much more complex. And I would dare to say that the issue is not just local. It’s not Israel and the Palestinians. I know the situation pretty well. In the ‘90s, I chaired the Israeli delegation to the multilateral peace talks on multilateral economic matters. We all recognized that the future is going to be bright. This was during the period of Prime Minister Yitzhak Rabin and then Shimon Peres. And so I’m sure that there is potential to prosperity, and the region will benefit because Israel’s technology, Israel’s desalination programs are such that the key challenges to the Middle East, to poverty, can be solved jointly. But I would say that it is not just the Israeli-Palestinian issue. It involves a much global issue. Today it is Iran, it is the Houthis in Yemen, and of course the proxies for Iran, namely the Hamas and the Hezbollah. Israel made significant progress in the path to normalization with Saudi Arabia, which is maybe one of the reasons why those who did not want this normalization to take place, they initiated the unfortunate, the extraordinary, disastrous, cruel massacre that happened on October 6th last year. Having said all of this, I am basically optimistic, and the reason why I’m optimistic is because there is no other alternative. There is no other alternative and we have seen significant ups and downs and we will see it there.
KATHLEEN HAYS:
Well, you’re certainly someone who’s lived this and been in the midst of it, and I appreciate you sharing all that, Jacob.
I’ve got a couple more things I want to ask you. They’re big questions and maybe we can give a nice, concise answer.
And I guess the one I want to start with is something you’re very concerned about, and that’s the growing role of financial markets in the transmission of monetary policy. And you mentioned financial stability and what that means, but just in a nutshell, what are you looking at in terms of the financial markets transmitting policy? What’s different now, and what do you see as the key here, the key question?
JACOB FRENKEL:
The transmission is now in a way much faster. Much faster because it goes through financial markets and financial markets by their nature are anticipating the events. But there is one important difference between what used to be, say, 20 years ago and now, or even 30 years ago: the role of the private sector. 30 years ago, if you wanted to stabilize a crisis, you put around the table the G5 or the G7, and they were handling it. If you needed to help a country, you put together five banks and it was over. Today, the financial industry is so diverse and the participants are including the private sector also. That’s why the interaction between the private sector and the public sector is becoming so quick and so important. And therefore the information and communication is the key.
KATHLEEN HAYS:
Quickly, because I think it’s starting to rain. Do you want to say something about the role of central bank independence?
JACOB FRENKEL:
Oh, my God.
KATHLEEN HAYS:
I felt a raindrop.
JACOB FRENKEL:
Central bank independence is the sine qua non, is the key for success. We have a lot of studies that show that countries that have had central bank independence are performing much better than others. And one of the reasons is the political system is much more short-term mystic. They are focusing on the short-term because they need to be reelected. Therefore, it was in the wisdom of the political system that they decided to relegate the role of monetary policy to an independent agency that looks to the medium term. Central bank must be protected by the law. The traditions should establish the fact that they are successful. And we will not let the rain affect either the interview or the independence of central banks.
KATHLEEN HAYS:
You see, folks, this is Jackson Hole. This is what it’s like to be at the Federal Reserve Bank of Kansas City Economic Symposium. You saw how sunny and warm it was when we started. Now here we are in the rain. But this is just the nature saying, yay, Jacob. Thank you so much.
JACOB FRENKEL:
Thank you. My pleasure. All the very best.
KATHLEEN HAYS:
Thank you so much. I’m Kathleen Hayes,. This is Central Bank Central in Jackson Hole, Wyoming.
