Central bankers are worried the effects of the coronavirus pandemic may linger far after a vaccine becomes available, with uncertainty weighing on growth for years to come and making it even harder to reach their inflation targets.
Indeed, the global economy may see a "long, bumpy" recovery requiring a new playbook from policymakers, Bank of Canada Governor Tiff Macklem said at the annual Jackson Hole economic conference, which took place virtually rather than at its usual mountain retreat in Wyoming.
His comments echoed other central bankers' concerns, underlining that while the world's top economic policymakers are not flying blind, the outlook is more uncertain than ever and monetary policy is not an all-powerful tool.
The Kansas City Fed's conference at times offered sobering assessments of the long-term drag the pandemic could have. Consumers and businesses will now fear pandemics as "tail events" that could throw off the economy, and they are likely to be more cautious in their spending as a result, one paper presented at the conference found.
"Belief scarring will depress output and investment substantially, and interest rates modestly, for decades to come," said Columbia University finance professor Laura Veldkamp, who co-authored the paper.
To be sure, participants listed reasons to be less pessimistic. A non-pandemic generation's beliefs would be less scarred; a quick vaccine and strong future prevention efforts could diminish those worries; and that soon after the 9/11 terrorist attacks, the public began flying again and did not shy away from living in high-rises.
Financial markets have also "rallied very sharply" after cratering in March and April, an indication that fears over a lack of risk-taking may be overstated, said Jan Hatzius, Goldman Sachs' chief economist. In addition, China has more or less achieved a V-shaped recovery after the massive shock its GDP took when the virus first appeared, Hatzius added.
Summarizing two days of debate, Massachusetts Institute of Technology economist Kristin Forbes said participants disagreed on whether the effects of heightened uncertainty "will be as strong or as negative" as they have been in the past.
"Time will tell, but this does raise real risk that this recession could last longer. There could be more scarring," Forbes said.
Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore, cautioned the world will never be "going back to the same" pre-pandemic economies. The pandemic is already causing a "structural reorientation," he said, crushing the tourism and service sectors while fueling telework and exacerbating existing inequalities.
"We've got to avoid a prolonged period of high levels of unemployment, and it's a very real prospect," Shanmugaratnam said. "It is not at all assured that we will get a return of tight labor markets."
Key to the solution will be investing in education, job training and matching unemployed workers to the job that fits them best, he said. Countries must also help give lower-paid workers more bargaining power against major companies — and ensure the pandemic does not wipe away their smaller competitors.
In the U.S., larger companies have amassed more and more patents and inventors since the 1980s, one possible factor behind the slowing of U.S. business dynamism and productivity growth, according to another paper presented at the conference. The pandemic "could exacerbate the state of business dynamism further," warned the paper's authors, economists Ufuk Akcigit and Sina Ates.
Central banks have launched a variety of business lending programs to help provide a bridge to small and mid-sized companies, but leaders said fiscal policy must continue to play a role in alleviating current strains.
"The task we have actually depends on the extent and persistence of fiscal support for the recovery," said Philip Lane, a member of the European Central Bank's executive board. Lane credited European Union leaders for their July agreement to establish a €750 billion coronavirus pandemic recovery fund.
The current combination of historically aggressive monetary and fiscal stimulus must continue for a long time, said Laurence Boone, chief economist at the Organisation for Economic Co-operation and Development.
"We cannot afford at the current juncture a repeat of the fiscal tightening that we saw in the Great Financial Crisis," she said.
Central bank messaging
Still, central banks can play a more effective role by ensuring the public fully understands their communications, participants said.
For starters, they need to recognize that the public is "notoriously uninformed" about monetary policy, another paper presented at the conference argued. Central bankers have struggled for years to lift prices closer to their targets, given that too-low inflation can reinforce itself and reduces the room for central banks to cut interest rates.
But trying to lift the public's inflation expectations "can sometimes backfire" because some households and businesses have a completely different understanding of what rising inflation means. Some will associate higher prices with a worsening economy, causing them to reduce their spending and denting GDP growth, the paper argued.
"There is scope for targeted communication that delivers simple and transparent messages to the public," co-authors Bernardo Candia, Olivier Coibion and Yuriy Gorodnichenko wrote.
That may not necessarily mean replicating the Bank of Jamaica's reggae videos, one of which reminds viewers: "Low and stable inflation is to the economy what the bass line is to reggae music."
But central bankers must ensure their communications are not "unnecessarily complex" and relate to people's experiences, the Bank of Canada's Macklem argued. Many Canadians do not feel like overall prices are falling when food inflation has averaged nearly 3%, he said.
Policymakers must engage with the public more, he added, highlighting the "Fed Listens" sessions the U.S. central bank has held and similar forums from the Bank of England as two examples. The Fed's sessions helped lead to a major change in the Fed's approach to meeting its inflation and employment goals, which Fed Chairman Jerome Powell laid out at the start of the conference.
While some are "preying on this crisis" by pushing misinformation, crises also prompt people to look to their institutions for clear information, Macklem said. That gives central bankers a chance to strengthen their connections with the public.
"This heightened interest is an opportunity, and it is critical that we do not squander it," Macklem said.