The politics of monetary policy – with Helen Thompson

In the second of a two part special, Luke Bartholomew and Paul Diggle are joined by Professor Helen Thompson, Professor of Political Economy at Cambridge University, and author of the recent book Disorder: Hard Times in the 21st Century. In this episode they discuss monetary policy, including the geopolitical and democratic consequences of US monetary hegemony, the future of central bank independence, and the likelihood of a recession. 

 The key takeaways are: 

 ·         Both the Great Moderation period of strong growth and low inflation, and the New Normal period of weak growth and low inflation were underwritten by low energy prices. The prospect of a return to structurally low energy prices in the near term seems very unlikely, making the job of monetary policy makers much more difficult. 

·         The Fed’s position at the centre of the global dollar system means its policy decisions have huge consequences for the rest of the world. In times of crisis this means the Fed has to act as lender of the last resort to much of the world, but even in “normal” times constrains the freedom of manoeuvre of various other central banks and governments. These concerns are likely to be particularly pressing in a period of rising rates. 

·         The current delegation of responsibilities between fiscal and monetary policy makers is highly contingent and may come under pressure in this period of high inflation. However, a return to fiscal policy acting as the key tool of macro stabilisation is unlikely, especially if it becomes tainted by association with this bout of inflation. 

The lesson from previous episodes of high energy prices and monetary tightening is that they typically end in recession, where demand destruction for energy comes about though economic weakness.