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

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

At the global central bank talkfest on 27 August, Powell put an end to the Inflation Targets decreed in the 1990s. https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm  Although the Bank of Canada and RBA never went along with targets, the hope is that the Fed influences all central banks, and Australia is only middle-sized, also subject to Frydenberg’s Reaganite influence.

Powell’s speech waffles in trying to minimise his turn-around – 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.

He says nothing as provocative as wage slumps or precarious work – whereas the RBA is begging openly for wage increases, for years. Covid-19 magnifies the urgency.

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

New Zealand was first with a savage 1% wage inflation ‘target’ (disinflation), but the BoC and RBA said they didn’t mind if wage inflation (CPI) went to 3% or more. (That is what the Fed now suggests.) The BoE slavishly followed the target, no matter how low British wages fell, as did Greenspan with precarious work doing the job for him. The BoC and RBA also refused to report “forecasts” for big finance actors to bet even more.

In regard to Friedman’s vaunted ‘independence’ from governments, the RBA had no qualms in working with Swan, Treasury and Rudd during the GFC, to put Australia as a world first, and only, that staunched the worst of it. The Liberal Party will not admit there was a GFC in Australia.

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 (or even QE) as usual, but the message of loose targets is very different. It’s directed at Trump and finance markets /Wall Street: The Fed will no longer give 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 Powell allies the Fed’s full employment remit to dumping the ‘natural rate’ (Friedman’s beloved, all unemployment is ‘voluntary’ piffle).

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: they all do that these days with hard money people.

Powell is also not interested in negative rates (nor the RBA) that Trump wants. The BoE imagines banks will lend for job-creating ventures by moving to negative Bank rates (also announced last week) – whereas since the 1970s, speculation took off, and firms are doing more share buy-backs. They will continue with Negative Rates as they did with QE. This infuriates the RBA. Without banks, only states can improve the job-wage situation.

What I think Powell is doing is calling for is proper central bank independence from a Wall Street and from Trump-type Administrations, like Morrison’s. Targets gave central banks no independence, under a 1980s pseudo-independence as in it no longer permitted central banks to engage with treasuries, which they do daily, or consolidate with them.

Funnily enough, the RBA and BoC could easily go against those 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 and Thatcher/Reagan’s infatuation, and Canadian and global banks have simply had to swallow that. Do they want ‘accommodation’, or do they die from their own recklessness?

CBs were only to give signals to finance markets, but governments made those rules. Targets were very damaging, if we consider what Powell has just done, and combine that with how the full employment (FE) 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 FE, 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 of the 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.

Central banks can bet against these traders all of their own accord. Global private banks know this, and Morrison/Frydenberg may have to learn quickly from their sainted USA (just the Federal Reserve!). The US Fed can short the lot of them.

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Jocelyn Pixley's research is on Citizenship and Employment (1993); Emotions in Finance (2004;2012), Mobile Capital, and Central Banks (2018), with CUP. She is an Honorary Professor in Sociology at Macquarie.

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