[Editor’s Note] As the natural rate of interest (whatever that might be) collapses it signals a triple witching hour for central bankers who credibility and efficacy have been undermined by their own lack of imagination and comprehension that borders on a pre-Copernican financial cosmology. resorting to an experiment in poorly understood negative interest rates and the vast nuclear arsenal of unintended consequences. Lack of attractive productive investment opportunities, systemic risk and volatility couple with coercing investors to change their natural risk profile are distorting asset prices, investment returns, the yield curve and credit spreads. Could turn out fine or could make 2007 look like a walk in the park as there are no tools left in the monetarists’ toolkit. Fiscal policy takes weay too long to be effective so we might just be SOOL. Don’t be surprised if this doesn’t end well.
From Wall Street Journal
When central bankers gather this week in Jackson Hole, Wyo., they will be consumed not with some pressing crisis in the global economy but by an existential threat to their relevance.
The threat stems from the realization that the sluggish economic growth that has prevailed since 2009 may be here to stay. If so, then so are today’s low interest rates.
Central banks set interest rates to balance investment and savings and thus keep economies fully employed and inflation stable. The interest rate that achieves that balance is called the natural rate. The fact that inflation and growth are now so sluggish despite ultra-easy monetary policy shows that the natural rate has fallen—by 1 to 2.5 percentage points since 2007 in the U.S., Canada, Britain and the eurozone, according to arecent Fed study. Fed policy makers think the U.S. natural rate is 3%, down from 4.5% before the recession. That’s 1.5 percentage points less ammunition to counteract the next shock to the economy.