Has the US Fed buried Milton Friedman’s monetary legacy?

The US Fed Chair Jerome Powell last week buried wage inflation targets. These were always terrible, but does this burial mean new hope?

At the global central bank talkfest on 27 August, Powell put an end to the Inflation Targets that were decreed in the 1990s.[i] Although the Bank of Canada (BoC) and Reserve Bank of Australia (RBA) never went along with targets, most central banks (CBs) did. The hope is that the Fed influences all central banks against targets.

Powell’s speech waffles in trying to minimise his about-turn – he starts by praising Fed Chair Volcker’s 1980 inflation attack (it stopped the US economy), Bernanke’s fictitious ‘Great Moderation’ (followed forthwith by the ‘Great’ Financial Crisis), as though there’s a seamless continuity in ‘moderation’ and he uses that tired word ‘evolution’ beloved by the Bank of England (BoE).

Powell discusses nothing as provocative as wage slumps or precarious work – whereas the RBA is begging openly for wage increases, and has done for years. At one stage, it hinted that unions must play a role in wage demands. Covid-19 magnifies the urgency of the slump in economic activity and the position of insecure, barely paid workers.

As for Inflation Targets, the RBA’s former Governor Johnston, speaking in 1992, described the proposed combination of a ‘new’ central bank independence and a single (wage) inflation objective as ‘bestowing on the Bank all the freedom of the prison exercise yard’. But in the Liberal Party government Treasurer Peter Costello after 1996 was slavish in copying Thatcher, Friedman et al.

The rationale for central bank Targets was that inflation (singular) was alleged to get out of hand ‘easily’. But in fact, inflations (in plural) are controllable without inducing a recession, whereas deflation is very difficult to raise, and calls for fiscal policy for national even global social needs are often ignored. In contrast, the Fed (at least) can reduce asset inflations by raising margins; taxes can be moved variably for other inflations, controls on price fixing and cartels should exist, and wage boards should examine relative rises, with a living wage floor.

Heedless, New Zealand was first with a savage 1% wage inflation ‘target’ (disinflation), while the BoC and RBA said they didn’t mind if wage inflation (via CPI) went up to 3% or more. (That is what the Fed now suggests.) Mervyn King at the BoE slavishly followed the target, no matter how low British wages fell, as did Greenspan with the growth in precarious work doing the job for him. The BoC and RBA also refused to report ‘forecasts’, which big finance actors could then ultilise to bet even more on futures markets.

In regard to Friedman’s vaunted ‘independence’ from governments, the RBA had no qualms in working with Australia’s Treasurer Swan and PM Rudd of the Labor Party during the GFC, to put Australia as a world first, that staunched the worst of it, with public works across the whole country, and an RBA cheque to each household. This Labor Government also exacted high taxes from the banks in return for their bailouts. The Liberal Party will not admit there was a GFC in Australia, to this day, and under then PM Tony Abbott wrecked Labor’s legacies to control the banks when it won office.

Of course, looser wage inflation targets have nothing to do with how central banks will continue to accommodate banks, i.e. they’ll provide liquidity as usual (or even QE if deflation looms). The message of loose targets is very different. The Fed’s move is directed at Trump and finance markets / Wall Street: The Fed will no longer give the confidence or certainty that a tiny hint of wage inflation will be stopped.

One interesting improvement from Janet Yellen’s sterling efforts on jobs is how her successor, Powell, allies the Fed’s full employment remit to dumping the ‘natural rate’ (Friedman’s beloved all unemployment is ‘voluntary’ piffle). If governments want to criticise the unemployed, there’ll be no more support in this regard from central banks.

The bubble game is up, in other words. Powell ends by defending the Fed’s ‘engagement with the public we serve. …the American people’. What a change from Fed Chair Greenspan and co. always asking what the market ‘thinks’.

It also puts Trump in an awkward position (if he understands). He said he wants to appoint a Judy Shelton who wants a deflationary gold standard (against Trump’s personal needs for cheap money). I suppose the FOMC could ignore her: after all most central banks ignore the hard money people these days.

Powell is also not interested in negative rates (nor the RBA), that Trump wants. The BoE imagines banks will lend for job-creating ventures at the prompt of negative Bank rates (also announced last week) – but since the 1970s when speculation took off, firms are now only doing more share buy-backs. They will continue with Negative Rates as they did with QE. Uncooperative banks and other firms, with zero interest in employment generation, infuriate the RBA. Without banks and firms playing their part, only states can improve the job-wage situation. There are so many really good jobs that Treasuries could help create or foster, with the proviso that firms pay a living wage. This latter has strangely become popular inside the British government, but not in the US or Australia.

What I think Powell is doing is calling for proper central bank independence from Wall Street and finance and from Trump-type Administrations like the Australian PM Morrison’s. Targets gave central banks no independence, also, under this 1980s pseudo-independence, because it no longer permitted central banks to engage with treasuries, which they do daily, or consolidate with their fiscal policies.

Funnily enough, the RBA and BoC easily went against those old orders. Central banks are self-financing, so they don’t need to grovel to governments for funds. They provide dividends to their sovereign state, in fact. The BoC never accepted Milton Friedman’s grievous influence on the hard money guys or Thatcher and Reagan’s infatuation with monetarism, and private Canadian and global banks have simply had to swallow that.

CBs were only to give signals to finance markets which, without doubt, do not ‘think’ at all, but governments made those rules. Targets were very damaging, if we consider what Powell has just done, and recall how the full employment remit was to prevent CBs from ever again destroying elected (social democratic) governments as they did in the 1930s in Britain, France and Australia (Bankers’ Ramps). The Fed and RBA have full employment remits, the BoC has ‘national welfare’ and output as remits, but most CBs only have price stability. With inflation targets gone, thanks to Powell, CBs have regained a type of independence that once graced our former public services – ‘without fear or favour’ and, for many of us in Anglo-America today, one of the few sources of informed debate.

I cannot say if this will have a lasting or global impact, but the US Fed can call the shots, stop the bond traders (if it wished) and aid all central banks’ room for manoeuvre. After all, the G5 central banks cut short the global Yen currency traders trying to destroy Japan during the 2011 tsunami and nuclear station meltdown. Currency traders lost very badly.

Central banks can bet against these traders all of their own accord but combined could slow their anti-social frenzies. Global private banks know this, and, in Australia, Morrison/Frydenberg may have to learn quickly from their sainted USA (not Trump, just the Federal Reserve!). The US Fed can short the lot of them.

Jocelyn Pixley is an Honorary Professor in Sociology at Macquarie University, Sydney, and Senior Research  Fellow at the Global Policy Institute, London. Her latest book is Central Banks (CUP, 2018).


[i] Jerome H. Powell ‘New Economic Challenges and the Fed’s Monetary Policy Review’,  speech given at  “Navigating the Decade Ahead: Implications for Monetary Policy,” an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 27, 2020. Available at https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm 


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