Central Bankers Can't Savor Their Stimulus Success

By Kate Davidson and Ben Leubsdorf Features Dow Jones Newswires

JACKSON HOLE, Wyo. -- Central bankers have been looking forward for years to a moment when the world economy is growing steadily again, allowing them to unwind extraordinary monetary stimulus from global markets.

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They are now in such a moment, but at the Federal Reserve's annual retreat here over the weekend they found their attention turned to other challenges, including a possible leadership transition at the Fed next year and the risk of a government shutdown or debt-ceiling crisis in Washington next month.

Congress returns to Washington in September with just a few short weeks in which to raise the federal borrowing limit and authorize new funding to keep the government operating beyond Oct. 1. Signs of angst over the debt limit are beginning to rise in financial markets amid worries lawmakers won't be able to close a deal on time. Treasury officials have urged Congress to raise the borrowing limit by Sept. 29.

"What's being discussed regarding the shutdown and the debt ceiling, we have to monitor very carefully," Dallas Fed President Robert Kaplan said in an interview on the sidelines of the conference. Fed governor Jerome Powell warned in a television interview that failing to raise the debt ceiling would be a "major shock to the economy," while Treasury Secretary Steven Mnuchin told reporters at a White House briefing Friday he was "100% confident" Congress would act in time.

Fiscal brinkmanship comes as the Fed is preparing to take the next step in its gradually unfolding plan to withdraw monetary stimulus from the economy. It has raised short-term interest rates four times since December 2015. Next month it is expected to announce it will start shrinking its portfolio of mortgage and Treasury securities by allowing some to mature without reinvesting the proceeds into new bonds.

"The base case for me is that we should begin the roll-down of the balance sheet very soon," Mr. Kaplan said. "Obviously I'm monitoring closely, though, events in D.C., and I'm hopeful they won't have an effect on our efforts to begin that process. But we'll have to see." The Fed next meets Sept. 19-20.

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Fed Chairwoman Janet Yellen did nothing to dispel the market's expectation that the Fed will start shrinking the portfolio next month. Her remarks Friday focused instead on bank regulation in the post financial crisis era. President Donald Trump has vowed to roll back regulation across sectors, but Ms. Yellen defended the Fed's efforts since the crisis to toughen oversight of banks, which she said has bolstered lending and economic growth rather than hindered it.

Rather than focusing on near-term monetary policy issues, most of the conference dealt with long-term challenges, such as rising protectionism, growing inequality and the ability of fiscal policy makers to respond to the next recession -- issues over which central bankers may have limited influence.

On the sidelines of the meeting, participants buzzed about the potential for a leadership shake-up at the Fed next year, as Ms. Yellen closes in on the final months of her four-year term as the leader of the U.S. central bank.

Ms. Yellen is a top contender for another term as Fed chair, Mr. Trump has said. He has praised her stance on interest rates and said he liked her. But Ms. Yellen's remarks Friday highlighted a difference in world views on regulation, which could lead Mr. Trump in another direction.

Mr. Trump has said his top economic adviser, National Economic Council Director Gary Cohn, along with "two or three" other candidates he declined to name, are also being considered, leaving markets and Fed watchers guessing about where policy might be headed beyond early next year.

Analysts have theorized about a handful of dark horse candidates who may be in the mix, several of whom attended this year's Jackson Hole gathering, including former Fed governor Kevin Warsh, Stanford economist John Taylor and Columbia Business School dean Glenn Hubbard, who was chairman of the Council of Economic Advisers under President George W. Bush.

Among her peers, Ms. Yellen earned high marks for her steady approach and clear communication as the Fed unwinds its crisis-era stimulus program.

"President Trump has to take his own decision, and that's his prerogative," Bank of Mexico Gov. Agustín Carstens said. "But I can speak for myself, and I can say that she has done an outstanding job."

South African Reserve Bank Gov. Lesetja Kganyago said Saturday that, since the so-called taper tantrum of 2013 that roiled emerging markets, the Fed has done an excellent job of communicating its policy plans to the public and financial markets. Ms. Yellen took over the Fed in early 2014.

"The Fed has actually communicated so well, so transparently, that it has actually made it easier for us when we have to make our own monetary policy decisions," Mr. Kganyago said. "We base our decisions on what we see the outlook for the U.S. economy is, and I think that the communication from the Fed has been so clear that if the markets decide not to believe what the Fed says, it is at their own peril."

Fed policy decisions are felt far beyond U.S. borders, he said, and "the more you have certainty about what is impending in the U.S., the easier it is for all of us who have make decisions."

Write to Kate Davidson at kate.davidson@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

August 27, 2017 13:17 ET (17:17 GMT)