While markets are hyper-focused on the Friday speech at Jackson Hole by Federal Reserve Chairman Ben Bernanke, they are overlooking what could be an equally important Saturday appearance by International Monetary Fund Managing Director Christine Lagarde.
In a last-minute program change, the IMFrequested that Lagarde address the premiere meeting of the world’s central bankers in exchange for outgoing IMF First Deputy Director John Lipsky. He briefly took over the fund during the Dominique Strauss-Kahn affair and will stay on with the fund as a senior advisor.
Lagarde’s appearance is more than just a coming out event for the new managing director. Indeed, as the former French finance minister she knows many of the players here in Jackson Hole. But an IMF managing director hasn’t addressed the group since 2004.
Lagarde appears at a time of global turmoil over fiscal, monetary, and currency policy. The alliances and co-operation that dominated the reaction of the world’s leading nations through the Group of 20 Nations (G20) to the 2008 downturn are looking increasingly frayed. At the Fedand at the Treasury Department, U.S. frustration is growing over the inability of Europe to forge an appropriate response to either its banking or sovereign debtcrises. Sources say U.S. officials have even crafted ideas to help Europe, but keep being turned down through back channels. These officials fear going public with their ideas since they could be seen interfering with European affairs.
Meanwhile, European officials both in monetary and fiscal circles are critical of massive U.S. deficits that show little sign of abating, and the brinksmanship politics that nearly brought the nation to default in the debt-ceiling debate. Many also think the Fed is way too far out on a limb in its super-accommodative monetary policy.
The specific criticism behind the scenes is that Bernanke is relying too much on “the output gap” model, in which high unemployment and overall economic slack is seen giving the Fed room to ease because it means low inflation. European monetary authorities tend to rely less on this view of the world and point out that the amount of slack in the economy is only ever visible after the fact.
With this backdrop, Lagarde will take the stage on the same day that outgoing European Central Bank President Jean Claude Trichet will speak. It will be a measure of Lagarde's skills whether she can at least begin the process of getting the leading nations on the same page to address this second wave of the financial crisis. Finance ministry officials from around the world are struggling behind the scenes to craft an action plan for the upcoming G20 meeting in France in November. One official says if the G20 can’t come together now, it may have outlived its usefulness as an organization.