The world's top central bankers gather at their annual U.S. mountainside symposium today with a sense there's not much more they can do to repair credit markets and rescue the global economy.
Reports in the last week showing a surge in inflation reinforce expectations that Federal Reserve Chairman Ben S. Bernanke will have to keep U.S. interest rates on hold. Similar conditions in Europe are paralyzing his counterparts at the Bank of England and the European Central Bank.
“All the central banks can provide now is time for the banking system to heal,'' Myron Scholes, chairman of Rye Brook, New York-based Platinum Grove Asset Management LP and a Nobel laureate in economics, said in an interview. “What more they have to offer is now very limited.''
Bernanke may discuss his strategy when he opens the conference in Jackson Hole, Wyoming, with a speech on financial stability at 10 a.m. New York time. His audience comprises a who's who of central banking, including ECB President Jean- Claude Trichet, Bank of Japan Deputy Governor Kiyohiko Nishimura and central bank officials from about 40 other countries.
The event, ending tomorrow, has been hosted by the Kansas City Fed in Grand Teton National Park since 1982.
In the U.S., borrowing premiums for banks and corporations are at their highest in months, prolonging the drag on growth. That's after Fed policy makers cut the main interest rate this year at the fastest pace in two decades, introduced three emergency-lending programs and helped Bear Stearns Cos. avert bankruptcy.
`Hope and Pray'
“There isn't a lot they can do'' now, said former Fed Governor Lyle Gramley, senior economic adviser at Stanford Group Co. in Washington. “The Fed really has to hope and pray that credit markets begin to heal by themselves.''
Europe's biggest central banks have refused to jeopardize their price stability mandates by lowering rates and have warned about the danger of bailing out investors.
Trichet's ECB raised its benchmark rate in July by a quarter point to 4.25 percent and the Bank of England is refusing to ease credit even with the U.K. near a recession.
“Many central banks around the world have been in a position where they have been focused on inflation, and they didn't have the same intensity of the slowdown that we saw in the U.S.,'' said former Fed governor Laurence Meyer, vice chairman at Macroeconomic Advisers LLC in Washington, in an interview at Jackson Hole.
The Fed, while leaving the benchmark interest rate unchanged for its last two meetings, says financial markets “remain under considerable stress.'' One gauge watched by the Fed, the premium for banks to borrow for three months over a measure of the future overnight lending rate, averaged 0.77 percentage point last week, the highest since April no qualifying payday advance.
The Fed's rate cuts also have failed to pass through to the housing market. The average rate on a 30-year fixed mortgage was 6.47 percent last week, about where it was a year ago.
“Higher mortgage rates and sharply tightening credit standards in mortgages have gummed up a key channel through which monetary easing is supposed to stimulate aggregate demand,'' said Mickey Levy, New York-based chief economist at Bank of America Corp., who is attending the symposium.
Pushed the Limits
Apart from lowering rates, Bernanke has pushed the limits of the Fed's powers to ease the crisis in credit markets. In December, he started auctioning 28-day loans to commercial banks. He followed that in March with a $200 billion program to auction Treasuries to investment banks in exchange for mortgage-backed securities and other debt. Bernanke also offered cash loans to other bond dealers that trade with the Fed.
With all these programs in place, Fed officials may be reluctant to do more without assurance that it will ease the credit crisis and not do more harm.
“They have done a lot, and at some point they simply have to give the markets the time needed to heal,'' said former Fed researcher Brian Sack, senior economist at Macroeconomic Advisers.
At the same time, investors are looking to the Treasury Department, not the Fed, to bail out mortgage-finance companies Fannie Mae and Freddie Mac using newly granted authority.
European policy makers, meantime, have refused to be as activist as their U.S. counterparts, arguing that they can't be seen to bail out investors who made risky bets. Trichet says the ECB's “collateral framework has served us pretty well.''
While the Bank of England in April followed the Fed in agreeing to swap damaged mortgage-backed securities for government bonds, Governor Mervyn King has resisted calls from lenders for it to buy securities outright.
Some, such as former Bank of England policy maker Willem Buiter, who will address the meeting tomorrow, argue that the Fed's actions to date store up trouble for the future.
“There will have to be a lot of soul searching about whether central banks, in their rush to forestall a financial disaster, have created moral hazard and perverse incentives on an unprecedented scale,'' Buiter said.