Draghi and Yellen Warn "US and EU Face Risks of Low Inflation and Low Interest Rates"

[Asia Economy Reporter Jeong Hyunjin] Former central bank governors, including Mario Draghi, have expressed concerns about the limited room for maneuver for central banks due to low interest rates. Former European Central Bank (ECB) President Mario Draghi and former U.S. Federal Reserve (Fed) Chair Janet Yellen emphasized the lack of tools that central banks can independently use amid low inflation and low interest rates, stressing the need to prepare countermeasures.

According to Bloomberg on the 5th (local time), former President Draghi participated via video in a panel discussion at the 2020 American Economic Association (AEA) conference held in San Diego, USA, stating, "I see a risk of 'Japanification' (Japanese-style prolonged recession) in the European region," and added, "If we act to prevent the worsening of deflation, it will not inevitably lead to a prolonged recession." He said, "The European region still has the capacity to defend against deflation," but added, "However, time is not infinite."

Former President Draghi has emphasized that low interest rates are effective in stimulating the economy. However, he expressed concern that the prolonged low interest rate environment has left central banks with little room to effectively implement monetary policy. At his retirement ceremony last October, he stated, "Low interest rates no longer provide the same level of stimulus as in the past," and "Monetary policy must be coordinated with fiscal policy to achieve growth targets faster and reduce side effects." This implies that even with expanded fiscal policy, the importance of monetary policy remains emphasized.

At this year's American Economic Association conference, Draghi mentioned that the ECB has pursued limited fiscal policy in recent years. He stressed that European countries should consider this when formulating policies. In particular, he advised European monetary policy officials to avoid falling into deflation. He further emphasized, "It is not too late for the European region to avoid deflation."

Former Chair Yellen also attended the discussion that day and expressed concern, saying, "Monetary policy plays a meaningful role, but it is unlikely to be sufficient over the coming years." She lamented that as the low interest rate period prolongs, risks to financial stability are increasing, and the U.S. lacks sufficient means to respond.

Yellen agreed with former Treasury Secretary Lawrence Summers' statement that the U.S. is experiencing a long-term stagnation as savings exceed investment, resulting in falling interest rates. She mentioned structural factors lowering interest rates, including population aging and declining productivity, and expects these to continue for the time being. However, she noted that the U.S. monetary policy should not be considered a failure as a tool to prevent economic slowdown simply because the benchmark interest rate is too low. She agreed that quantitative easing (QE) and forward guidance, proposed by former Fed Chair Ben Bernanke, can be used as stimulants to revive the economy.

Former Chair Bernanke stated the day before, "To achieve appropriate effects, monetary policy must find new strategies rather than relying on past methods," presenting QE and forward guidance as new monetary policy tools that emerged in the 21st century.

Along with former central bank governors, current central bank officials also forecast that the currently low interest rates could fall further. John Williams, President of the New York Fed; Philip Lane, Chief Economist; and Ben Broadbent, Deputy Governor of the Bank of England (BOE), attended the American Economic Association session that day and predicted that the 'R-star' could decline in the future. R-star refers to the neutral interest rate, which is the ideal level of interest rate that can achieve potential growth without fueling inflation.

President Williams argued, "Looking at demographics, we will see R-star decline." Although estimates of the neutral interest rate are generally broad, Fed monetary policy officials typically consider the neutral rate fixed at about 2.5% based on short-term financial market (call market) rates. The neutral rates in Europe and Japan are generally estimated to be lower than that. They explained that due to various structural factors such as aging populations and slowing productivity, the neutral interest rate is expected to decline over the coming years. Chief Economist Lane said, "We do not rule out scenarios where it falls further."

This content was produced with the assistance of AI translation services.