Twenty years ago, central bankers were proudly narrow-minded and conservative. They made a virtue of caring more about inflation than about the average citizen, and took great pains to be obsessively repetitive. As future Bank of England (BOE) governor Mervyn King said in 2000, their ambition was to be boring.
The 2008 financial crisis abruptly dashed that objective. Ever since, central bankers have been busy developing new policy instruments to fight fires and ward off emerging threats. Nonetheless, many secretly dreamed of returning to the good old days of cautious conservatism (with financial stability taken seriously).
But recent announcements by the US Federal Reserve and the European Central Bank suggest that there is no going back. Central bankers are now keen to take on responsibility for policy objectives they previously shied away from – in particular, tackling inequality and climate change.
Start with inequality. If there was a red line in the delineation of responsibilities between elected and unelected officials, it was that distributional, give-and-take choices belonged solely to the former.
Yet, the Fed has announced that it will now pay attention to “shortfalls” of employment from its maximum level, instead of “deviations.” According to Chair Jerome Powell, the main reason for this change is the realization that a tight labor market benefits low-income communities and ethnic minorities. Only when the aggregate unemployment rate is very low do those on the fringes of the labor market benefit from significantly better access to jobs and higher wages.
Policymakers have long known that a high-pressure economy benefits the unskilled and minorities, and the Fed is special in having a dual congressionally assigned mandate of achieving both price stability and full employment. What is new is that instead of defining its own tasks in purely macroeconomic terms, the Fed has now indicated a willingness to take part in a collective anti-poverty effort.
The reason, the Fed says, is that listening to citizens has convinced it of the heterogeneity of the US labor market and the benefits of testing the downward limits of unemployment. But in yesterday’s world, the Fed was proud to be insulated from politics and therefore not to listen to citizens.
The ECB has not completed its policy review yet. But it is unlikely to draw the same conclusions. Whereas the Fed can regard higher inflation in Colorado as an acceptable price to pay for a tight labor market in Mississippi, the ECB cannot operate the same way. European countries have limited appetite for such solidarity. Instead, what European central bankers are increasingly considering is support for climate action.
The ECB is not entering new territory here. In a landmark 2015 speech, then-BOE Governor Mark Carney emphasized the financial-stability risks arising from climate change and the responsibility they imposed on regulators. This insight made climate risks a topic of concern for financial-system supervisors.
But today’s eurozone central bankers are going further. ECB President Christine Lagarde has said she intends to “explore every avenue available in order to combat climate change,” while fellow board member Isabel Schnabel has alluded to excluding brown bonds from monetary-policy operations. And Banque de France Governor François Villeroy de Galhau has suggested applying a carbon-related haircut to assets accepted as collateral.