Why it's tricky for Fed officials to talk politically
Should speeches by Federal Reserve officials be limited to topics concerning monetary policy and financial stability, or should they be free to speak on any topic, no matter how politically charged it might be? It's an important question as the Fed prepares to announce next week what's looking like a significant change in its eight-year policy of zero-perecent interest rates.
Fed Chair Janet Yellen, for example, was sharply criticized for a speech last year highlighting what economists know about rising inequality and what might be done to overcome it.
This speech, which Yellen gave in October 2014, is still creating controversy. This week, it erupted again when UC Berkeley economist Brad DeLong defended Yellen against the charge that she's a "partisan hack," a description in the headline of a Washington Post story by Michael Strain after Yellen's speech.
Strain, resident scholar at the American Enterprise Institute, had complained that:
Federal Reserve Chair Janet Yellen announced that "the extent of and continuing increase in inequality in the United States greatly concern" her. "I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."
Well. I think it is appropriate to ask whether the Fed chair should be expressing concern over whether income inequality is un-American. And to answer: No. The Fed chair shouldn't sound like a left-leaning politician opining about hot-button political issues.
I think Strain's criticism goes beyond what Yellen actually said. In her speech, she was careful to note (as he acknowledged): "My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion."
And although she did say she's personally concerned about inequality, she also said: "I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history" She's saying she thinks we should ask the question, not that her view is necessarily correct.
Nevertheless, despite Yellen's attempts to avoid political issues and stick to the facts, I'm not a fan of this speech. In my view, Federal Reserve officials should limit their comments to issues linked to monetary policy and financial stability.
That doesn't mean they can't talk about, for example, highly contentious political issues such as fiscal policy. Monetary policy in normal times operates in the market for Treasury debt, so monetary and fiscal policies are intertwined. Nothing is wrong with a Federal Reserve official talking about what the consequences would be for monetary policy if fiscal policymakers take a particular action -- for example, cutting the federal budget during a recession.
Former Fed Chair Ben Bernanke and other Fed officials were correct to let fiscal policymakers know that if they didn't help stimulate the economy, the Fed would be stuck longer at the zero lower bound for interest rates. In the Fed's view, the liftoff for interest rate hikes, which is finally coming, could have happened sooner with the help of Congress.
That's different from saying what the government should do. It simply lays out the consequences various fiscal policy choices have for the Fed. This is what Yellen failed to do. She didn't tie her comments on inequality to Federal Reserve policy.
For this reason, I disagree with something else Strain said on a separate occasion when he criticized Yellen's speech.
It is perfectly appropriate for the Federal Reserve chair (occasionally) to discuss the size of the rich-poor gap, its trend over time, and its economic causes and consequences. But the Fed chair should do so as an impartial, dispassionate analyst.
That's what economists are supposed to do generally, focus on the implications of various policy choices using theoretical and empirical analytical tools. They're not supposed to take a position on what should be done, that's the job of the political process.
But the Fed chair has an institution to protect, and its independence from politics is crucial to its success. Imagine the fights over monetary policy if Congress had been in control -- would anything useful have come of them? Would we have even gotten past silly discussions about returning to a gold standard?
Simply raising an issue implies a belief that it's more important than other issues (why talk about inequality instead of tax cuts for business?). And no matter how hard Fed officials try to steer clear of politics and focus on analytics, their statements will be used politically anyway.
Yellen isn't an expert on inequality, and even if she were, why risk a political backlash by discussing issues unrelated to the Fed's mandated mission?
It would not have been hard for her to connect inequality with monetary policy. Housing prices and the value of financial assets have a close connection to inequality, and evidence is mounting that too much inequality can inhibit economic growth.
Thus, the Fed's actions in stabilizing financial markets, preventing housing bubbles and so on are connected to future economic growth.
Questions should also be asked about the degree to which Fed monetary policy, particularly quantitative easing, has contributed to inequality by inflating the price of financial assets, which are held disproportionately by the wealthy. Bernanke has argued forcefully that QE's employment effects for the working class were much larger than the impact on asset prices in terms of inequality, so it's not as though these questions aren't well-known.
Yellen tried to follow Strain's advice and stick to "impartial, dispassionate" analysis. She tried to present the facts on the problem and the proposed solutions while steering clear of advocacy. But the reaction to her remarks shows how difficult this is.
The Fed is under enough pressure right now, and Congress is trying to impose rules intended to chip away at the central bank's independence. The Fed is resisting, rightly in my view. And last thing it needs is for the Fed chair, however careful and well-intentioned, to give politicians a reason to become even more determined to limit the institution's independence and its ability to respond to economic developments in the way it believes is best.