Former Treasury Secretary Larry Summers’ criticism that the Federal Reserve and other central banks are focusing too much on “awakened” social issues reflects a growing concern that policymakers are not paying enough attention to the inflation.
The argument from Mr. Summers, a Democrat, also comes as Senate Republicans try to stop Congressional Democrats and President Biden from pressuring the Fed to install regional directors who would dedicate part of their functions to climate change and racial equity. They describe it as a dangerous case of “deviation from the mission” of the traditional role of the central bank of ensuring maximum employment and price stability.
The 12 Republicans on the Senate Banking Committee fired a warning shot this month against the Fed’s regional offices in Boston and Dallas, which are looking for new presidents.
âSeveral regional Federal Reserve banks, including yours, have embraced politically charged social causes outside the Federal Reserve’s historic mission and statutory mandate,â the senators wrote to the Boston office. âThis mission creep threatens the credibility and independence of the Federal Reserve. The role and purpose of federal regional reserve banks is to limit the concentration of power in DC and to represent the economic interests of their respective regions, not to engage in partisan politics.
Mr Summers sounded the alarm this month at a virtual conference hosted by the Institute of International Finance.
âWe have a generation of central bankers who define themselves by their awakening,â said Summers, who is now a professor at Harvard University. âThey define themselves by their social involvement. We are more at risk than we have in my career of losing control of inflation in the United States.
He said the problem is even worse in Britain and Europe.
Ludovic Subran, chief economist at the insurer and Germany-based asset manager Allianz SE, said Summers had chosen a “media-savvy” way of expressing concerns about the growing role of central banks in the aftermath of the COVID-19 pandemic and financial crisis of 2007-08.
“There’s this idea that central banks have gone beyond their welcome by extending their tenure,” Subran told the Washington Times. âWhat he opposes is quite interesting, this idea that the distributive effects on the labor market are more important than price stability. It is indeed a question: where do central banks stop? Right now, they do the heavy lifting for every problem, including climate change, including tackling inequality. “
He said of Mr. Summers’ criticism: “I don’t know if it was right to use that term. [wokeness], but what I find interesting is to ask the question of compromises.
Last year, Fed officials took a broader approach towards the goal of maximum jobs, pledging to keep the benchmark interest rate close to zero even as inflation soars. sharply. Central bankers are also increasingly considering climate change as part of their portfolio.
Dean Baker, co-director of the Center for Economic and Policy Research, said the Fed “is doing the right thing in the face of the hysteria of its critics.”
“Critics want to see him act quickly to slow down the economy so that they can get good aid again at a low price,” he wrote in Eurasia Review. “Specifically, they would like to see the Fed end its quantitative easing program (buying bonds and other assets) and raising the short-term interest rate it controls, in order to reduce demand in the economy. “
But Mr Baker said higher interest rates “will slow down the economy by making it more expensive for people to buy homes and cars because they now have to pay a higher interest rate on their mortgages.” and their auto loans â.
In previous decades, he wrote, the Federal Reserve “has been very quick to raise interest rates because of concerns about inflation.”
âHowever, this is only half of the Fed’s mandate in conducting monetary policy,â he wrote. âIt also has a mandate to promote a high employment rate. [Fed Chairman Jerome] Powell made a clear break with his predecessors by giving equal priority to a high employment rate, acknowledging the huge gains for the country from maintaining low unemployment rates. As Powell noted, the big winners from low unemployment rates are those at the bottom of the labor market – the people who experience the most discrimination. “
Consumer prices in the United States rose 5.4% in September from a year earlier, the Labor Department reported last week, tying the largest annual gain since 2008. Mr Biden said said in July that the high inflation was “temporary,” but some leading economists now say it will likely persist for most of 2022.
“These pressures will persist until the middle of next year,” Gita Gopinath, chief economist of the International Monetary Fund, said on CBS “Face the Nation” on Sunday. âAnd then we should see ourselves back to more normal inflation levels by the end of next year. But that’s going to take a while and we certainly see costs going up. Energy prices have come back sharply again. increased at this time of year, and that’s going to fuel headline inflation.
Former Fed Chairman Janet Yellen disagreed with Summers’ assessment.
âI think he’s wrong, I don’t think we’re about to lose inflation control,â she said on CNN’s âState of the Unionâ. âAs we move forward in the fight against the pandemic, I expect these [supply-chain] bottlenecks are being resolved. Americans will return to the workforce as conditions improve. “
She said Democrats’ $ 1.9 trillion COVID-19 relief package last spring “partially caused this high demand for goods,” but said it was also “very important in ensuring that the pandemic has not had a healing effect on American workers. “
âIt gave them enough income and support to get by without – while still being able to put food on their tables and keep roofs over their heads,â Ms. Yellen told the host Jake Tapper.
Summers cited several reasons for what he called his “very big concern,” including loose monetary policy, soaring house prices, a record federal budget deficit and excess household savings. He said central banks are not preparing investors for the tough actions that will be needed to control inflation.
âIf these actions happen, they are going to be very shocking and very painful in the financial markets,â he said.
Republican lawmakers have expressed growing concern about where the Fed is heading. In March, Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, opened an investigation into “mission drift” at the US central bank’s 12 regional outposts.
He asked for information on the Federal Reserve Bank of San Francisco’s research on climate economics.
“A significant portion of the FRBSF’s research appears to focus on how issues unrelated to monetary policy impact small subgroups of people,” Toomey wrote in a letter to the Fed chief. from San Francisco, Mary Daly.
Mr. Toomey and his Republican colleagues said Federal Reserve banks in Atlanta, San Francisco and Minneapolis were the most active in advocating for social justice causes.
The Bank of Minneapolis, for example, has taken steps to tackle racial inequality since George Floyd died in police custody last year. The bank, led by Neel Kashkari, who led the Troubled Asset Relief Program under President Obama, has publicly “pledged to dismantle structural racism.”
The Fed has started including climate change in its financial stability report, joining the Network of Central Banks and Supervisors for Greening the Financial System. He also created a committee to assess the potential impact of climate change on banks and markets.
“We question both the purpose and effectiveness of banking regulation and climate-related scenario analysis, in particular because the Federal Reserve has no environmental jurisdiction or expertise.” Mr. Toomey and other Republican senators told the Fed in a letter. “This effort is not grounded in science or economics, but rather is a self-fulfilling prophecy: pretend that there are financial risks with energy exploration and other underprivileged investments, then use the levers of the government – through the unelected bureaucracy – to prohibit or limit these activities. “