The annual meeting of global central bankers in Jackson Hole, Wyoming hardly evokes the jet‑set glitz of Davos. The chair of the US Federal Reserve may be one of the world’s most prominent Grateful Dead fans, but we are unlikely to see Jerome Powell spinning a DJ set in the Hamptons any time soon.
That is no bad thing. Part of the central‑banker aesthetic is fustiness by design. Predictability is a virtue in monetary policy: markets want decisions to follow a transparent, well‑signalled logic, with rate moves carefully telegraphed to minimise surprises.
As we recently discussed, this is precisely what makes stagflation such a wildcard. The mandate and the theory may be clear, but policy becomes far harder to anticipate when it is unclear what the optimal path forward should be.
Beyond the bank
The energy shock and broader geopolitical instability mean policymakers may be looking at a broader range of tools beyond government spending and central bank interest rate intervention. As Bank of Korea Governor Rhee Chang Yong suggested, “it is becoming increasingly difficult to achieve economic stability and growth through monetary and fiscal policy alone.”
At the same time, geopolitical unorthodoxy could mean that functions that had previously been the domain of central banks become more explicitly politicised.
Dollar swap lines are a notable case in point. In the wake of the Global Financial Crisis, the US Federal Reserve extended dollar swap lines to central banks in other countries to contain disruption to global US dollar funding markets.
More recently, dollar swap lines returned to the headlines when, for what some observers viewed as politically charged reasons, the US Treasury directly offered a swap line to Argentina.
And as Adam Tooze suggests, proposed swap lines extending to the UAE may also point to political manoeuvring, with swap arrangements serving as innocuously technocratic‑sounding wrappers for financial support to strategic partners.
Politicised economy
As Gillian Tett notes, while European officials worry that access to swap lines depends on staying on the right side of the White House, Treasury Secretary Scott Bessent could reasonably counter that this is simply how geoeconomics works.
But equally, Tett cautions, the overt politicisation of swap lines raises the question of how a coordinated response to another global financial crisis would be organised: “Washington was able to do that effectively in late 2008 because the other western central banks trusted the Fed, and each other — and other governments respected Washington’s lead.”
As the divergent responses of the US and EU to the global financial crisis demonstrate, economic policy is always the outcome of political decisions, but the stability of the system depends on how far those politics can still be subordinated to shared rules, institutions and trust.
The future role of the dollar
Talk of de‑dollarisation can be overdone. In the near term, a more politicised dollar architecture may even reinforce US monetary power, with swap lines and discretionary access to dollar liquidity acting as instruments of discipline, keeping allies aligned and markets orderly in moments of stress.
Over the longer term, however, overtly politicised access to dollar liquidity could lead even close allies (among the principal beneficiaries of the dollar system) to become more open to alternatives. The implications for FX markets may be gradual at first, but potentially more consequential over a longer horizon.
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