(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)<\/p>\n
LONDON, May 7 (Reuters) – Central banks\u2019 new-found zest for tackling inequality suggests that they were at least partly responsible for it in the first place – but some influential voices are pushing back hard on that idea.<\/p>\n
Markets now pore over every detail of U.S. jobs statistics for signs of lagging cohorts in the post-pandemic recovery. Friday\u2019s April payrolls release will be another case in point.<\/p>\n
That\u2019s largely because the U.S. Federal Reserve\u2019s strategic review last year committed it to \u201cinclusive\u201d full employment, citing the drag on economic potential from marginalised groups and income inequality.<\/p>\n
As a result, it\u2019s now widely assumed the Fed will keep policy loose until as many disadvantaged income, ethnic and age groups as possible get back into work – even if aggregate jobless rates appear at \u2018full employment\u2019. And its more flexible averaging of its inflation target over time allows it run the economy \u201chot\u201d for longer to facilitate that.<\/p>\n
Fed chair Jerome Powell insists inequality merely \u201caugments\u201d thinking and has its limits. But the move partly responds to the charge that Fed tightening came too soon in prior recoveries to ensure all households were able to fully take part.<\/p>\n
And yet \u2018lower for longer\u2019 seems at odds with the other oft-heard critique of central banks – namely that excessively low interest rates and asset purchases over the past two decades actually increased wealth inequality by pumping up the value of stocks and bonds already mostly owned by the richest 10%.<\/p>\n
Damned if they do and damned if they don\u2019t perhaps. But the complexity of issue questions whether central banks can really do anything effective in this space at all.<\/p>\n
The Bank for International Settlements this week raised a red flag over blaming monetary policy directly for rising income and wealth gaps and warned central banks against thinking they could now right that notional wrong.<\/p>\n
On Thursday, BIS chief Agust\u00edn Carstens insisted the direct impact of central bank policy on inequality gauges was fleeting and shouldn\u2019t distract from the overwhelming priority of macro stabilisation – preventing booms and busts far more damaging to job prospects and incomes for poorer households over time.<\/p>\n
\u201cOver the long run, inequality is not a monetary phenomenon,\u201d he told an online Princeton University event.<\/p>\n
\u201cThe best contribution monetary policy can make to an equitable society is to try to keep the economy on an even keel by fulfilling its mandate,\u201d the former Mexican central bank chief added. \u201cGovernments can reduce inequality through more direct fiscal and structural policies.\u201d<\/p>\n
Carstens argued high inflation should continue to be seen as a regressive tax and that poorer households were the least able to hedge against it as incomes were usually fixed in nominal terms and their savings held in cash or bank accounts.<\/p>\n
Indexation mechanisms only offered relief depending on their frequency of adjustment but real wages typically fall anyway and inflation just entrenches.<\/p>\n
But there was a limit to the reduction of inequality from cutting inflation. He cited studies showing clear relative gains for low incomes families from taming inflation from high levels, but negligible gains from reducing inflation from already low levels achieved in developed economies over recent decades.<\/p>\n
\u201cThis result suggests that the interaction between inflation and inequality becomes much more complex when inflation is low.\u201d<\/p>\n
Central banks\u2019 jobs were complicated by a lack of reponsiveness of inflation to interest rates due to globalization and technology, he added, and also by a need to consider how the growing financial sector amplified cycles like never before.<\/p>\n
Had bond buying altered the picture? He pointed out that income and wealth dispersion across developed economies had been rising for more than two decades prior to the banking crash and the introduction of \u2018quantitative easing\u2019 (QE).<\/p>\n
And even if QE-inspired asset inflation added to the problem in the short term, that was a lesser issue for the disadvantaged than facing the havoc that would have been wreaked without QE.<\/p>\n
\u201cMany more jobs would have been lost. And these jobs benefit all, including the young and low-skilled households which suffer from higher and more cyclical unemployment.\u201d<\/p>\n
Stable job creation over time was much more effective than toying with inflation, in effect.<\/p>\n
To be sure, there was no direct criticism of the Fed – even an acknowledgement of Powell\u2019s analysis of avoiding persistent joblessness in vulnerable groups. But it was a clear push back against both the consequences and ambitions of central banks in this area of policy.<\/p>\n
Should the BIS matter in this respect?<\/p>\n
Dubbed the \u2018central banks\u2019 central bank\u2019, the Basel-based forum often plays the role of policy watchdog.<\/p>\n
And yet it\u2019s been something of a Cassandra in recent decades – most notable for its repeated and largely ignored warnings about the danger of overly lax monetary policies before the global banking crash of 2007\/08.<\/p>\n
As many fret about or even welcome a new higher inflation regime post-COVID, the reaction of central banks over the next couple of years will show whether their own central bank has been listened to this time.<\/p>\n