On October 17th, Federal Reserve Chair Janet Yellen visited Boston in the midst of stock market turmoil and questions of monetary policy. Instead of delivering a speech on those more conventional topics, Yellen dedicated her entire thirty minutes at the podium to sounding the proverbial alarm on income inequality. In perhaps her most controversial speech as a public official, she slammed the rising trend in the country, saying “its appropriate to ask whether this trend [of rising inequality] is compatible with values rooted in our nations history, among them…equality of opportunity.” The speech was widely covered on national news, as this was Yellen’s first time speaking at length about the issue. Many have viewed the speech as a validation of widespread concerns of runaway incomes for the top 1 percent. Some praised her as a Fed chair for the people, “A champion for the working class.”
In a recent conversation with the Harvard Political Review, Professor N. Gregory Mankiw, Chair of the Harvard Economics Department, and no stranger to central banking, had a less enthusiastic view. “I thought it was a mistake,” he said. While praising Yellen as a “fantastic economist and the right choice for the job,” he said “she has to recognize she is no a longer an independent economist; she’s part of the Federal Reserve System.”
The Federal Reserve does not really have a history of publicly dealing with issues outside the realm of monetary policy. For the past several decades, Federal Reserve Chairs have avoided issues with the kinds of social and political ramifications that income inequality has. Former Chair Ben Bernanke only tackled the issue once publicly, and drew on similar topics that Yellen did recently. However, Bernanke used his words much more carefully, closing his speech by saying:
“I will not draw any firm conclusions about the extent to which policy should attempt to offset inequality in economic outcomes; that determination inherently depends on values and social trade-offs and is thus properly left to the political process.”
By concluding on such a note, Bernanke drew a sharp line on where he thought the Federal Reserve should stand on such hotly contested issues.
Indeed, Yellen’s remarks do come as a little surprising for the head of a non-partisan government institution. Without a doubt, income inequality has become one of the defining economic trends of the generation. President Obama even remarked that it is “the defining challenge of our time.” Despite this importance, Mankiw says, “when a Federal Reserve Chair weighs in on a topic that is very, very distant from monetary policy and that is highly politicized, she is putting the Federal Reserve in a political realm where it really shouldn’t be.” He also noted the timing of a speech of such social impact “Just weeks before a hotly contested election on an issue that is so clearly associated with one party, puts the Fed in a political realm it should not be close to. Given the sensitive timing, the speech was ill advised.”
The timing of the speech does raise some important questions, as Democrats such as Elizabeth Warren have been stumping across the country decrying inequality as well. The Federal Reserve itself says that independence from such “political pressures” is vital to its operation. Mankiw continued, “Everyone [in the government community] knows that Yellen is a liberal democrat, but that really shouldn’t influence her job as Federal Reserve chair.” Bernanke kept his partisan allegiances under wraps from even his closest colleagues.
While Yellen’s speech has brought about many questions, one thing is now clear. She will not accept the status quo of economic trends, and will keep expanding the Fed’s role to help Americans in tough economic conditions.