Three months ago, the issue was barely debated in the United States. America had returned to growth, the unemployment rate was at its lowest (5.1 percent of the labor force), economic indicators were in the green. All the conditions for the American Federal Reserve’s monetary policy to raise its prime rates, which are currently almost zero, seemed to be fulfilled. The economists wagered that this would happen after the Fed’s meeting on Sept. 16 and 17.
But today, they’re sure of nothing once again. In the last few weeks, more people have spoken out to try to convince the Fed to wait before acting — most notably Larry Summers, Barack Obama’s former economic adviser.
His argument? Inflation in the U.S. is still too far from the 2 percent target set by the Fed. That’s because salaries haven’t really increased, which is a sign that the labor market is not in a good state. In addition, an increase in the cost of borrowing has caused enormous losses to pension funds which hold many American public bonds, so the value of these bonds is changing in direct contrast to the rates. So it’s imperative that we wait.
Watch Out for Instability
However, this approach is not risk-free. Keeping rates low for too long, as well as implementing unconventional monetary measures such as buying public debt, risks creating bubbles and above all, can lead to destructive instability, especially on the stock markets and in real estate. And it’s definitely not just in the United States. The British recovery is overly reliant on the increase in property prices, a number of experts warn. Therein lies the catalyst for future crises. To avoid the worst-case scenario, central banks therefore have an interest in normalizing their policies as soon as possible.
What contradictory proposals for the world’s great financiers! The world has become addicted to unconventional measures and low rates. But like all drugs, the latter can have harmful side effects.
Worse still, the central banks’ procrastination reveals two worrying phenomena. The first is that their actions have failed to revive growth and inflation to as great an extent as hoped. Many economists, such as Michel Aglietta at the Centre d’études prospectives et d’informations internationales (Center for Future Studies and International Information)*, explain that low rates are not enough to revive investment in businesses, which rely more on their order books to decide whether to borrow.
Still, the stock market boom, fueled by the central banks, has primarily benefited richer households, whose assets are invested in stocks. This contributes to greater inequality and has no real effect on growth, since well-off households save more than they spend.
The conclusion to draw from this is that monetary policies can’t do everything. Without structural measures from governments to encourage investment and limit the rise in inequality, they can even turn out to be counterproductive. Mario Draghi, the president of the European Central Bank, repeats this at every press conference. But there are none so deaf as those who will not hear ...
*Editor's Note: There is no official English translation of the name of the institution, so this translation of the name is merely informational for English readers.