Janet Yellen has been criticized for last week’s speech on inequality. However the Fed should be concerned about inequality with respect to monetary policy.

Tony Yates posted a critique of Janet Yellen’s inequality speech last week, arguing that the Chair of the Federal Reserve should keep out of implicitly political issues, for fear that it would degrade the independence of the central bank, and degrade the power of her position and words.

On the face of it, it is hard to disagree with Yates. The Fed is an inherently apolitical organization, and by politicizing an issue like inequality, it “makes it more likely that the next appointee will be chosen more for political acceptability than macroeconomic and monetary expertise.”

It is not that Yates is wrong on this point, but rather, the critique seems incomplete.

    • Central bank policy is directly tied to income and wealth distribution: How many times in recent years have we heard from Fed critics that QE is only further enriching the already wealthy, while hurting savers? This is true – the wealthy own the vast proportion of financial assets, which have increased in value with looser monetary policy. But its not as if the Fed has only looked at one side of the argument. Their decision is made on the premise that this outcome is better than the alternative – which is likely a slower growth, if not an outright deflationary environment, which historically tends to breed an even wider wealth gap (see: Piketty). The Fed has done the cost-benefit analysis, and while imperfect in execution and outcome, it won out.
    • Monetary policy decisions are based labor market conditions, including (especially) wage growth: By the Fed’s own analysis, wages have been stagnant for nearly all Americans for decades. While this has partly been the result of a lot of exogenous factors, this widening inequality in income distribution should still be an important consideration for the Fed in policy decisions, per the dual mandate. Wages are directly tied to productivity, and monetary policy can (or at least attempt to) spur businesses to invest in long-term, healthy growth. Boosting aggregate demand is also somewhat (though not completely) within the scope of the Fed. These factors should support solid, steady wage growth across the economy over the long-run. However, this connection between economic growth and wages has broken down, and there may not exactly be an efficient way Yellen and Co. can do something about it. Which leads us to consider the ongoing three-ring circus in Washington.
    • The Fed doesn’t want to deal with this issue – but it has have been forced to: Fiscal policy is the natural home of resolving inequality, but policy makers have punted on the issue. Anything from corporate tax reform, minimum wage growth, the EITC, or even immigration policy could have a substantive effect on creating a better balanced economy, but nobody in Congress has done anything about it – how many FOMC policy statements in a row have contained the phrase, “Fiscal policy is restraining economic growth.” Instead, they have in effect passed the buck to the Fed – the unelected technocrats who can’t be kicked out of office if, unlike legislators, they dare make a decision on anything. Janet Yellen was forced to speak about inequality, and perhaps not because she wants to. Solving the inequality problem through monetary policy is more roundabout and ineffective than through fiscal policy, but somebody has to do it.

That said, where Yellen went wrong in her speech is that she made it seem too impassioned – or at the very least, it reads as being too impassioned, though in a glaringly apparent mismatch, she adopted her Central Banker-tone throughout the speech. This was a point agreed to by Yates’s argument #6. She should have instead sold the idea as being more directly tied to monetary policy, rather than general commentary (then again, there are just some things the world’s premier monetary authority can and can’t say). But that doesn’t mean Yellen shouldn’t speak to inequality, or is unqualified to speak to it. She has been forced into a position where she MUST speak to it – not only because it is well within the bounds of the Fed mandate, but also because she has by default become the authority in Washington on it.