© Reuters. FILE PHOTO: A buyer pays with a euro banknote in a market in Nice, France, April 3, 2019. REUTERS / Eric Gaillard // File Photo
Posted by Mike Dolan
LONDON (Reuters) – Central banks’ newfound enthusiasm for tackling inequality suggests they were at least partially responsible – but some influential voices are forcefully pushing back that idea.
Markets are now scouring every detail of US employment statistics for signs of cohorts lagging in the post-pandemic recovery. The release of pay slips on Friday in April will be another example of this.
This is mainly due to the fact that the US Federal Reserve made mandatory full employment “inclusive” last year as a result of its strategic review, with the economic potential of marginalized groups and income inequality being affected.
As a result, it is now widely believed that the Fed will hold policy loose until as many disadvantaged incomes, races and ages as possible are back to work – even if the overall unemployment rate is at “full employment.” And his more flexible averaging of his inflation target over time allows him to keep the economy “hot” longer to make that happen.
Fed Chairman Jerome Powell insists that inequality is only “reinforcing” thinking and has its limits. However, the move responds in part to allegations that the Fed’s tightening on previous rallies came too early to ensure that all households could participate fully.
And yet, “longer, longer lower” seems to contradict the other criticism of central banks that is often heard – that low interest rates and asset purchases over the past two decades actually increased wealth inequality by already increasing the value of stocks and bonds mostly owned by the richest increased 10%.
Damn if they do and damn if they maybe don’t. The complexity of the issues, however, raises the question of whether central banks can do anything effective in this area.
The Bank for International Settlements hoisted a red flag this week for blaming monetary policy directly for widening income and wealth inequalities, warning central banks that they could now correct this fictitious error.
On Thursday, BIS chief Agustín Carstens insisted that the direct effects of central bank policy on inequality indicators should be fleeting and not distract from the overwhelming priority of macro stabilization – to prevent booms and busts from increasing employment prospects and incomes for poorer households over the course of the year Making time far more harmful.
“In the long run, inequality is not a monetary phenomenon,” he said at an online Princeton University event.
“The best contribution monetary policy can make to a just society is to try to keep the economy at a steady level by fulfilling its mandate,” added the former head of Mexico’s central bank. “Governments can reduce inequality through more direct fiscal and structural policies.”
Carstens argued that high inflation should continue to be viewed as a regressive tax and that poorer households were least able to hedge against it, as incomes were usually nominal and their savings held in cash or bank accounts.
Indexing mechanisms only offered relief depending on their frequency of adjustment, but real wages usually fall anyway and inflation only entrenches itself.
However, the reduction in inequality through lowering inflation has been limited. He cited studies showing significant relative gains for low-income families from containing inflation from high levels, but negligible gains from reducing inflation from already low levels achieved in developed countries in recent decades.
“This finding suggests that when inflation is low, the interaction between inflation and inequality becomes much more complex.”
Central bank jobs have been hampered by the inability of inflation to respond to interest rates due to globalization and technology, as well as the need to examine how the growing financial sector has lengthened cycles like never before.
Had buying bonds changed the picture? He pointed out that income and wealth dispersion in developed countries had increased for more than two decades before the bank crash and the introduction of “quantitative easing” (QE).
And even if QE-inspired wealth inflation contributed to the problem in the short term, it was less of a problem for the disadvantaged than for the chaos that would have been wrought without QE.
“Much more jobs would have been lost. And those jobs benefit everyone, including the young and low-skilled households who suffer from higher and more cyclical unemployment.”
Stable job creation over time was actually far more effective than playing with inflation.
Of course, there was no direct criticism of the Fed – nor any recognition of Powell’s analysis of avoiding prolonged unemployment in vulnerable groups. However, it was a clear knockback against the consequences and ambitions of central banks in this policy area.
Should the BIS play a role in this?
The Basel-based forum known as the central bank often plays the role of policy watchdog.
Yet it has been something of a Cassandra for the past few decades – most notable for its repeated and largely ignored warnings of the dangers of overly loose monetary policy ahead of the 2007-08 global banking crash.
As many as resent or even welcome a new higher inflation regime after COVID, the reaction of the central banks in the next few years will show whether their own central bank was heard this time.
(by Mike Dolan, Twitter: @reutersMikeD. Charts by BIS and Vincent Flasseur; Editing by Alexandra Hudson (NYSE :))