Originally published in The Next Recession

Every August, the regional Kansas City Federal Reserve holds a symposium for the world’s central bankers to consider their role in economic policy and important developments in the world economy.  The head of the US Federal Reserve usually presents a summary of how he (or she) sees the state of US economy and what action the US Fed should take in trying to meet its set targets of keeping price inflation moderate (no more than 2% a year) and achieving ‘full employment’. The gathered central bankers also receive presentations from a range of mainstream economists to improve their ‘expertise’.

At this year’s symposium of central bankers in the major economies, current Fed chair Jay Powell was under pressure.  First, the US economy is showing significant signs of stubbornly high inflation and falling employment.  Second, Powell was being called an ‘idiot’ and ‘moron’ by the US President Trump for not reducing the Fed’s policy interest rate.  This so-called ‘policy rate’, decided by a Fed Committee, sets the interest rate that banks and other institutions can borrow from the Fed as the ‘lender of last resort’.  So that rate in effect becomes the floor for all other borrowing rates: government bonds, corporate loans, mortgages – and even interest rates in foreign currency markets where the dollar dominates.  The current policy rate is around 4%-plus; Trump wants it cut to 1% and is threatening to sack Powell and other Fed committee members and then appoint a new chair of the Fed, if Powell does not act.

At Jackson Hole, Powell did hint that he would support a cut in the Fed’s policy interest rate in September, but probably only 25bp (1/4pt).  He was still concerned that US inflation was staying stubbornly above the Fed’s 2% a year target and he feared a likely upward impact from Trump tariff hikes – still to be felt.

Goldman Sachs economists have created a model to examine the movement of import prices in response to tariffs, using product-level figures and tariff rates.  They estimate that foreign exporters have absorbed 20 per cent of Trump’s tariff increases, but that won’t last for long.  Already prices at the factory gate are beginning to rise and that will eventually feed through to retail and consumer prices.  ‘Pass-through’, as it is called, is coming.

At the same time, employment growth has been falling fast and the official unemployment rate is ticking up. As Powell said: 

The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.

And Powell probably knows that massive jobs data revisions are coming: on 9 September, the Bureau of Labor will release its preliminary benchmark revision to net jobs increases for the year to last March. Goldman Sachs estimates the revision could cut existing reported payrolls by 550-950,000 jobs. This implies that the jobs growth was overstated by a massive 45,000-80,000 jobs per month.

In sum, inflation remains above target and full employment is disappearing. Powell posed the dilemma: “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation.” Indeed! 

In his speech, Powell was more concerned with the deteriorating employment situation ie he was more worried about stagnation or recession than rising inflation: 

Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.

And the US economy has been slowing down.  Apart from the Magnificent Seven of tech giants with their huge profits and their astronomic spending on AI capacity, US manufacturing remains in recession and the rest of the economy is crawling along.

The irony is that the Fed, like other central banks, has little effect on the economy through monetary measures.  So the Fed has been reconsidering its monetary policy ‘framework’.  It still holds to the view: that “the inflation rate over the longer run is primarily determined by monetary policy,” but it has to say that, because otherwise there is no need for ‘monetary policy’! Yet in 2010s, the US inflation rate dropped below the 2% target even though the Fed cut rates to zero, and after the COVID pandemic ended, inflation rocketed despite sharp rate hikes by the Fed and has remained stubbornly above the 2% rate. Indeed, US inflation has remained above ‘target’ for more than four years. And now both inflation and unemployment are likely to rise from here, whatever the Fed does.  Monetary policy does not work.

That’s because there are much more important ‘non-monetary factors’ that affect employment and inflation, like global supply chain disruption, and changes in the profitability of investment and in the supply of labour.  On the latter, there is the downward impact of an ageing population and the rising effect of immigration.  Both can significantly affect the supply of labour over the longer term.

These ‘supply’ trends were discussed by the mainstream economists invited to the Jackson Hole symposium this year, under the theme: “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy”. What is happening to the supply of labour globally?  Will there be enough for capital to exploit and boost surplus value?  Claudia Goldin from Harvard University told the great and good of banking at the symposium that “fertility decline is everywhere in the world today.” Birth rates in the rich countries of the so-called Global North have been below what is needed to replace deceased humans for decades – and that gap has accelerated since the Great Recession.

Goldin reckoned the reasons for the decline in fertility was mainly due to women entering the workforce and those with careers not having children.  More to the point, couples increasingly cannot afford children, given the huge cost of child care and the lack of state support. Goldin: “The downside of fertility is that greater female autonomy in the absence of sufficient change to guarantee support will produce lower birthrates.”  Chad Jones from Stanford University suggested that one solution was to get men to share clhild-care. (!) In recent years, US population has only risen because of immigration but the recent policy of successive US administrations is to reduce that.

What do the population projections globally suggest? The UN consensus projection is for the world’s population to level off at about 10m and then start falling.  That’s because the fertility rate will fall below two per family.  Jones reckoned this is bad news because fewer humans will mean fewer technological advances (unless you think AI can do the job).  GDP per person may rise to begin with as the population peaks and falls, but eventually the loss of new technical advances would lower GDP per person.

In another paper, Linda Tesar found that within the US, labour mobility between states was pretty much unchanged.  Despite reasonable labour mobility, ‘left behind’ areas suffer from poor economic and social outcomes with little ‘out migration’ of workers or ‘in-migration’ of jobs. Regional inequalities of income thus remain, despite mainstream economics claiming that the ‘free market for labour’ reduces disparities. In his paper, Lawrence Katz from Harvard University found that from the 1980s, better education for some increased inequality of incomes within the labour force (surprise!), but in the last two decades this educational advantage has weakened ie graduates now gain less of an income advantage over non-graduates. Ufuk Akcigit from Chicago University argued that “AI can mean the loss of jobs for some sectors but also boost jobs in others.”  Nothing new there.

But it is the large companies that will gain most.  That’s because they dominate research and development, replacing the state which dominated up to 1970s, and now the large companies get the bulk of government subsidies for tech.

Laura Veldkamp of Columbia University reckoned that for now, only 4% of jobs used AI for at least 75% of tasks. 1/3rd of jobs used AI for 25% of tasks. (Anthropic Econ Index, 2025).  But AI will hit wage share in national output by as much as 5%.

Other papers presented discussed the efficacy of central bank monetary policy.  Back in the 1970s, mainstream economist John Taylor developed a rule for central bank rate policy.  The Taylor rule assumed an “equilibrium federal funds rate of 2% above the annual inflation rate”.  This was supposed to keep inflation under control without hurting real GDP growth.  But Emi Nakamura of the University of California-Berkeley and Jordi Galí showed in their presentations that the Taylor rule was inadequate in the 2010s when inflation headed towards zero and in the post-COVID period when inflation inflated.  Once again, central bank monetary policy, whether based on the Taylor rule or not, did not ‘manage’ inflation.  And that’s because inflation is driven by changes in value through the supply of labour, not by demand, as the post-COVID period graphically showed.

Ludwig Straub of Harvard University looked at the relation between fiscal deficits, government debt and monetary policy.  He suggested that an ageing population with savings will look to invest in government bonds.  “This implies that there is space for the government to finance its additional outlays by increasing its debt.” The paper’s authors suggest that governments like the US or Japan could continue to allow government debt-to-GDP to rise even up to 250% and not drive bond yields up – but apparently only if governments reduce their fiscal spending.  This seems like a contradiction to me.

Perhaps the most instructive of the various presentations were by the central bankers of the UK, the Eurozone and Japan, not that of the US.  The governor of the Bank of England Andrew Bailey presented a truly awful picture of the state of the UK economy. UK potential growth has fallen with weaker productivity.  Labour force participation has not recovered in the UK compared to other OECD countries, mainly because of poor health in the labour force.

ECB President Lagarde, in her presentation, tried to explain why unemployment rates have not risen so much in periods of slump and/or rising interest rates. She argued that 

part of the answer lies in global factors. Monetary tightening helped bring inflation back to target, but it coincided with other forces that supported activity: an easing of supply constraints worldwide, a steep drop in energy prices and proactive fiscal policies – all of which help explain the unusually low sacrifice ratio.

Above all, wages did not match the rise in prices and the pandemic slump saw a fall in hours worked, so companies kept their workers on as prices and profits rose:

Real wages fell by nearly 2% between late 2021 and early 2023, and only gradually caught up with cumulative productivity growth early last year. By widening the gap between productivity and labour costs, it eased unit labour cost pressures and supported firms’ profitability, while also making labour relatively more attractive than capital. Both dynamics encouraged firms to expand hiring.

So it was a profits-led inflationary spiral. 

After a brief dip during the lockdowns, the Eurozone labour force was back to its pre-pandemic level by the end of 2021 – and has since grown by about six million people.  The supply of labour rose partly because of more women and older workers joining the labour force, but mainly from foreign immigration, which has accounted for half the rise in the labour force since the end of the COVID slump.  “In Germany, for example, GDP would be around 6% lower than in 2019 without the contribution of foreign workers.  Spain’s strong post-pandemic GDP performance – which has helped support the euro area aggregate – also owes much to the contribution of foreign labour.”

Bank of Japan governor Kazuo Ueda also looked to foreign immigration to reverse the fast falling Japanese workforce, down 10m in the last 30 years.  The working-age population peaked in 1995, while the total population peaked later, in 2008.

Currently, only around 50 percent of women workers in Japan are regular employees, compared with around 80 percent for men. Although foreign workers account for only around 3 percent of the labor force, their contribution to labour force growth from 2023 to 2024 exceeded 50 percent.  Alternatively, the BoJ governor hoped that the productivity of the existing labour force (which, by the way, is stagnant) could be boosted by AI.  But he showed that AI is still not actively used by firms in the major economies, particularly Japan.

In summary, what do all these papers at the Jackson Hole symposium tell you?  First, it is the value created by human labour that is key to economic growth and living standards, not changes in the cost of borrowing or lending money and the decisions of central bankers on interest rates.  The ‘supply side’ of an economy is what matters.  All the papers implied that.

The general conclusions were that: 1) human labour supply is likely to peak globally and fall in the imperialist core over the next few decades, so 2) that means the major economies can only achieve economic growth (and capital can only get more profit out of human labour) by raising the productivity of labour through technology substitution (AI?). Within any one country, more labour can be obtained through immigration or by moving capital to areas where labour has lower wages and a pliant workforce.  But that is increasingly difficult.  The impact of monetary policy in altering interest rates and the money supply is negligible compared to these underlying trends.

Nevertheless, mainstream economics and central bankers plough on with their claims that economic growth and prices can be modified by monetary measures.  In reality, the cost of borrowing and lending mainly affects the financial sector and speculation in financial assets.  That is why the likes of the Financial Times and the Wall Street Journal worry about the attacks on Fed chair Powell by Trump.  They paint this as an attack on the ‘independence’ of central banks to decide monetary policy and as a defence of ‘expertise’ on economies over political interests. 

Maurice Obstfeld of the Peterson Institute for International Economics finds ending central bank independence deeply worrying. 

These attempts to discredit expertise are ultimately going to end up showing themselves in the markets… Even though expertise doesn’t always get it right, it’s much better than going with what’s politically convenient at the time … If we have appointees who are primarily political loyalists, rather than people who have the right economic experience, this will be a material threat to evidence-based policymaking … And it may not achieve what Trump wants it to, because if you sacrifice central bank independence and rates are reduced to unwarranted levels, then investors will worry about inflation, long-dated interest rates will rise, and people will move away from dollar assets.

Exactly.  This ‘independence’ really allows the financial sector to look after its fictitious capital (bonds and stocks) and the profits gained at the expense of wages and real value.  Many decades ago, governments in the major economies acceded to this monetary independence and ‘expertise’.  And what has it achieved in sustaining economic growth, raising employment and controlling prices? The Jackson Hole symposium will be the last that Fed chair Jay Powell will address as his term is coming to an end. He will leave as public confidence in the Fed is close to all-time lows.