COLUMN-Central banks called on in the fight against inequalities: Mike Dolan


(The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his own)

LONDON, May 7 (Reuters) – Central banks’ new enthusiasm for tackling inequality suggests that they were at least partly to blame in the first place – but some influential voices strongly reject the idea.

Markets are now examining every detail of US employment statistics for signs of cohort delay in the post-pandemic recovery. Another example will be the release of Friday’s payrolls in April.

This is largely because the US Federal Reserve’s strategic review last year committed it to full “inclusive” employment, citing the drag on the economic potential of marginalized groups and income inequality.

As a result, it is now widely accepted that the Fed will maintain its loose policy until as many disadvantaged incomes, ethnic groups and ages as possible return to work – even if aggregate unemployment rates appear at “ “ full employment ”. And its more flexible averaging of its inflation target over time allows it to run the economy “hot” longer to facilitate that.

Fed Chairman Jerome Powell insists that inequality simply “increases” thinking and has its limits. But the move responds in part to the accusation that the Fed’s tightening came too early in previous recoveries for all households to fully participate.

And yet, “ lower longer ” seems at odds with the other often-heard criticism of central banks – namely that excessively low interest rates and asset purchases over the past two decades have in fact increased wealth inequalities by increasing the value of stocks and bonds already predominantly. owned by the richest 10%.

Damned if they do and damned if they maybe don’t. But the complexity of the matter calls into question whether central banks can really do anything effective in this space.

This week, the Bank for International Settlements raised a red flag by directly accusing monetary policy of widening income and wealth differentials and warned central banks against the idea that they could now correct this wrong. theoretical.

On Thursday, BIS chief Agustín Carstens insisted that the direct impact of central bank policy on inequality gauges was fleeting and should not distract from the overwhelming priority of macro -stabilization – prevent booms and collapses that are much more damaging to the employment prospects and incomes of poorer households over time. .

“In the long run, inequality is not a monetary phenomenon,” he said during an online event at Princeton University.

“The best contribution that monetary policy can make to a fair society is to try to keep the economy on a level playing field by fulfilling its mandate,” added the former head of Mexico’s central bank. “Governments can reduce inequalities through more direct fiscal and structural policies.”


Carstens argued that high inflation should continue to be seen as a regressive tax and that poorer households were the least able to cover themselves, as incomes were usually fixed in nominal terms and their savings held in cash or on bank accounts.

Indexation mechanisms only offered relief based on how often they were adjusted, but real wages are falling anyway and inflation is only getting stronger.

But there was a limit to reducing inequalities by reducing inflation. He cited studies showing clear relative gains for low-income families in controlling inflation from high levels, but negligible gains in reducing inflation from already low levels achieved in developed economies over the past decade. of the last decades.

“This result suggests that the interaction between inflation and inequality becomes much more complex when inflation is low.”

Central bank jobs have been complicated by a lack of responsiveness to inflation to interest rates due to globalization and technology, he added, as well as the need to consider how the financial sector growing amplified cycles like never before.

Has buying bonds changed the game? He pointed out that the dispersion of income and wealth in developed economies had increased for more than two decades before the bank crash and the introduction of “quantitative easing” (QE).

And while QE-inspired asset inflation added to the short-term problem, it was less of a problem for the underprivileged than dealing with the havoc that would have been done without QE.

“Many more jobs would have been lost. And these jobs benefit everyone, including young and low-skilled households that suffer from higher and more cyclical unemployment. “

Creating stable jobs over time was actually much more effective than playing with inflation.

To be sure, there has been no direct criticism of the Fed – even an acknowledgment of Powell’s analysis of avoiding persistent unemployment among vulnerable groups. But it was a clear step back from the consequences and ambitions of central banks in this policy area.

Should the BIS be of importance in this regard?

Dubbed the “central bank of central banks,” the Basel-based forum often acts as a political watchdog.

And yet, this has been something of Cassandra over the past few decades – especially for his repeated and largely ignored warnings about the danger of overly lax monetary policies prior to the 2007/08 global banking crash.

While many worry or even welcome a new, higher inflation regime after COVID, the reaction of central banks over the next two years will show whether their own central bank has been listened to this time around.

by Mike Dolan, Twitter: @reutersMikeD. Graphics by BIS and Vincent Flasseur Editing by Alexandra Hudson


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