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Trump's shock becomes real



The one who was ready to express his indignation, former Fed Vice President Stanley Fischer, boiling over how few central banking members are ready to challenge Mr Trump, said the forum that the president is the biggest threat to the international monetary system.

Dr Fischer said he "tried to destroy the global trading system."

In front of the audience on Saturday [Sunday AEST] which included former Fed president Janet Yellen as well as current board members such as vice president Richard Clarida along with governors from around the world, including Asia, Canada, New Zealand and Israel, Dr. Lowe said that "political shocks are becoming now economic shocks. "

"Here in the US, we saw an earlier example of this yesterday; you have Brexit, Hong Kong problems, tensions between Japan and South Korea, "he said in a final panel discussion.

The Financial assessment sparse access to foreign media has been granted to listen to Dr. Lowe's comments & # 39; a.

Dr Lowe, critical of the global trend towards ever lower interest rates, firmly defended the recent interest rate cuts at the Reserve Bank.

He applauded the academic research presented at the symposium by Alan Taylor of the National Bureau of Economic Research and San Francisco economist Oscar Jorda, who indicates that central bankers are increasingly making decisions based on global rather than domestic forces.

Dr Lowe said the Reserve Bank has the impression that "there is absolutely no autonomy" to such naval forces.

These forces include what, according to many central bankers in Jackson Hole, has led to a structural decline in so-called Equilibrium interest rates around the world, often called R * monetary policy scientists.

Economists have defined R * as the actual short-term interest rate in an economy that has reached normal unemployment, in line with the 2% inflation target. In recent years, economists have been fiercely debating the reasons for the decline in equilibrium rates since the global financial crisis and whether it will remain low.

Dr Lowe argued that many of the forces lowering these rates are global, including increased savings, demographic change and increased global supply of service workers.

"The end result … are lower rates and an economic system that is less prone to inflation than in the past," he said.

And for decision makers at the Reserve Bank: "If the world interest rate changes, we also need to change ours. Otherwise, the exchange rate will strengthen, which will have negative consequences "for the inflation purposes of the Reserve Bank.

Dr Lowe also explained the bank's approach to the inflation target of 2-3%, suggesting that, unlike its introduction a quarter of a century ago, there was less demand for slave-like compliance with the past, which was partly due to the establishment and maintenance of the bank's central credibility in terms of price stability.

Dr Lowe said that signs of falling equilibrium rates around the world are "reinforcing the already strong argument for a very flexible inflation target."

"While people in financial markets can be very worried about whether inflation is 1.6, 2 or 2.2 percent … many in our communities are unbelievable."

"They would say" you certainly have more important things to worry "and I think we should.

"Achieving the goal is not the end goal. Rather, the end goal is to maximize prosperity. "

If companies do not want to invest because of increased uncertainty, small changes in interest rates are unlikely to encourage them to invest.

– RBA Governor Philip Lowe

Dr. Lowe added that the Reserve Bank was "prepared for considerable flexibility" in order.

Due to the global political turmoil that dominates the headlines, Dr Lowe said this prompted companies to avoid investment and could ultimately affect their employment plans.

On the other hand, a return to political stability can unleash a "very successful period when we are catching up with investment and a period of easing financial conditions" worldwide.

Due to the deepening trade war between the US and China and constant doubts about other hot spots, central banks around the world have lowered interest rates in recent months.

However, Dr Lowe warned that if every central bank operated in the same way, no country would enjoy the usual benefits of interest rate cuts as a result of exchange rate depreciation.

"Every individual central bank knows that exchange rate depreciation is part of the monetary easing mechanism," he said. "But if all central banks ease their reaction to global political shocks, there will be no exchange channel for any single central bank.

"We trade with each other. Not with Mars.

"This means that monetary policy responding to global political shocks will not get the normal exchange rate effect. I think, therefore, that monetary policy easing has its limitations.

"If companies do not want to invest because of increased uncertainty, small changes in interest rates are unlikely to prompt them to invest," he said.

"However, we can be sure that lower interest rates will increase asset prices … and we had problems because of that."

Dr Lowe again called on countries to consider infrastructure expenditure to increase productive assets and take advantage of the very low external financing costs for projects with 'very long-term payments'.

Another option, structural reform, would be the "best leverage" to ensure sustainable living standards.

However, with the three big political levers of political stability, fiscal policy and structural reforms effectively "stuck" around the world, the fourth – monetary policy – will continue to bear "too much weight," he said.

"And probably at a time when monetary policy is not the best leverage to deal with the shocks we face."


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