More than a year into the credit crisis, the world’s top central bankers admit they are still in the dark as to what its ultimate impact on the global economy will be.
By the same token they are unsure to what extent weakening growth will help to ease high inflation.
“There is enormous uncertainty about where we stand at the moment,” Stanley Fischer, governor of the Bank of Israel, said at the close of the Federal Reserve’s annual retreat in Jackson Hole, Wyoming.
His comments came as US Treasury officials worked through the weekend on options for Fannie Mae and Freddie Mac, the troubled mortgage groups, amid expectations an announcement could come this week.
Mr Fischer told central bankers from 43 nations “we are in the midst of the worst financial crisis since World War II”. But it was still not clear how big an event it would turn out to be.
So far, he said, “in real economy terms we are not looking at anything exceptional”. But the crisis was entering a “second round” in which economic and financial weakness could feed on each other.
Other current and former central bankers shared this view. Alan Blinder, a former Fed vice-chairman, said: “It is amazing a year later how much is still unresolved.”
Monetary policymakers appear torn between hope that the global economy is turning out to be resilient ÔÇô in part thanks to policy interventions ÔÇô and fear that the worst could lie ahead.
They think the economy will muddle through and recover next year. But they cannot rule out the possibility that the financial crisis ÔÇô in conjunction with the oil shock ÔÇô could deliver a bad economic outcome.
Policymakers also differ on the global distribution of the growth risk. US officials see the slowdown in Europe as vindicating their view that the squeeze will hit all industrialised economies.
However, eurozone officials attribute its slowdown to oil and a high exchange rate, rather than a domestic credit squeeze.
All central bankers privately admit they want some economic slack to put downward pressure on inflation. The question is how much they need and how much they are going to get.
All remain concerned about price increases in spite of the recent moderation in oil. They thought Ben Bernanke, Fed chairman, was bold to highlight this in a speech on Friday.
Over the past year, the Fed has cut rates by 325 basis points, while the Bank of England has cut by only 75 basis points and the European Central Bank has raised by 25 basis points.
Much of the difference is because the US is at the centre of the credit and housing shock ÔÇô and is less vulnerable to a wage-price spiral. But most central bankers believe that even taking this into account, there are strategic differences in how the big central banks have responded.
Some feel Fed policy risks fuelling inflation. Others, however, worry the ECB could stay too tight too long.
Yutaka Yamaguchi, a former deputy governor of the Bank of Japan, warned that policy mistakes are easy to make in periods of “exceptional uncertainty”.
