The Economist - USA (2020-11-28)

64 Finance & economics The EconomistNovember 28th 2020

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spoke to executives from five of the euro

area’s biggest banks. None thought the

ecb’s cheap funding alone would stir de-

mand for credit, or encourage banks to

lend to risky prospects. Ms Lagarde insists

stimulus is “not exclusively a fiscal busi-

ness”, and that the ecbcan still do its bit.

But in a speech on November 11th she made

a forceful case for further fiscal action.

There have been two criticisms levelled

at Ms Lagarde. One is that communication

slip-ups over the past year show that she

has only a weak grasp of the technical de-

tail of monetary policy. That may in part re-

flect economists’ snootiness. But her mis-

steps did indeed move markets. In March

her comment that the ecb“was not here to

close spreads” sent Italian government-

bond yields soaring. In September her

seeming indifference to a strengthening

euro and its impact on inflation meant the

currency only rose further against the dol-

lar. Both were followed the next day by an

explanatory blog post from Philip Lane, the

bank’s accomplished chief economist—

seeming to correct the president’s words.

Ms Lagarde is only too aware of the fact

that markets hang on her every word, and

now carefully watches what she says. In or-

der to stress collective decision-making,

blog posts by Mr Lane and others on the

bank’s executive board will no longer ap-

pear immediately after a press conference.

Some wonks reckon she has improved

markedly on the job. Still, it is hard to imag-

ine her becoming a conviction rate-setter.

Where she does have conviction is on

matters such as climate change and gender

equality, subjects that she promoted while

at the imf, to which grey-suited monetary

policymakers generally give a wide berth—

and which are the source of the second

concern about her approach to central

banking. It is instructive to compare Ms La-

garde’s speeches and interviews over the

past year with those of Mario Draghi, her

predecessor. Though “inflation” has fea-

tured 190 times, she is half as likely to men-

tion it as Mr Draghi did in 2018 and 2019. By

contrast, Ms Lagarde has mentioned “cli-

mate change” 80 times—compared with

just seven across Mr Draghi’s entire eight-

year term.

Climate change, according to Ms La-

garde, is an element not just of the ecb’s

“secondary” objective—which is to support

the eu’s economic policies. More contro-

versially, she sees it as having a bearing on

the bank’s primary mandate of price stabil-

ity. She has said before that the bank will

consider the merits of “green” qe, which

would tilt bond-buying away from pollut-

ers. The idea clashes with the views of

many central bankers, including Jens

Weidmann, the head of the Bundesbank. At

a Bloomberg conference on November

16th, both Ms Yellen and Lord King worried

about mission creep at central banks. Few

economists think climate change has a big

influence on inflation; most would point

out that changing polluters’ behaviour is a

job for elected officials.

Ms Lagarde intends to win over the rest

of the ecb’s 25-strong governing council

during the bank’s strategy review, due to

conclude in mid-2021. It will cover every-

thing from relatively uncontroversial

tweaks to the inflation target to more con-

tested areas, the financial-stability effects

of low interest rates and, of course, climate

change. She says she hopes to convince her

colleagues to “appreciate that they should

be not only on the right side of history and

face their children and grandchildren with

a straight face, but be able to focus on the

core mandate of price stability”.

That the euro area has avoided a finan-

cial crisis means Ms Lagarde can look back

on the past year with some satisfaction. But

her term lasts for eight years—far longer

than many politicians or executives hang

around for. Her push to broaden the ecb’s

mission has just begun. And if some coun-

tries (eg, Germany) return to economic

normality sooner than others (eg, Italy),

then the ecbwill also face tough choices

about when precisely to unwind its emer-

gency measures. The outsider’s next seven

years promise to be more controversial

than the first one. 7

A job half done

Sources:RefinitivDatastream;Bloomberg *Five-year,five-yearforwardswaprate

2 4 3 2 1 0

-1

20191817162015

Ten-year government-bond yields

%

Italy

Spain

Germany

2.5

2.0

1.5

1.0

0.5

0

20191817162015

Market measures of expected inflation*

%

United States

Euroarea

I

n the firstinstalment of the “Harry Pot-

ter” series, the protagonist stumbles

across the Mirror of Erised. Anyone who

looks into the mirror sees the “deepest,

most desperate desire” of their hearts re-

flected back at them. There is a touch of Er-

ised about President-elect Joe Biden’s deci-

sion to nominate Janet Yellen as America’s

next treasury secretary, first reported on

November 23rd. No economist is more

qualified than Ms Yellen, a former head of

the Federal Reserve and a respected aca-

demic, for the job. Perhaps more impor-

tant, however, for what is a political role as

much as an economic one, people from the

progressive left to the conservative right

can see something to like in her.

In today’s political configuration, that

matters. Mr Biden must tame a split in the

Democratic Party between run-of-the-mill

centrists and tear-it-down millennial so-

cialists. And before she becomes treasury

secretary, Ms Yellen must be confirmed by

the Senate, which Republicans currently

control. That hurdle ruled out candidates

such as Elizabeth Warren, a senator from

Massachusetts whom many Republicans

would never confirm because she is seen as

too hostile to free markets and the finan-

cial industry.

In the days before the announcement

Washington insiders believed the race was

between Ms Yellen and Lael Brainard, a go-

vernor of the Fed. Some favoured Ms Brai-

nard on the grounds that she had more ex-

pertise in trade economics, others because

she is younger than Ms Yellen, and would

therefore do a better job of balancing an el-

derly president. Left-leaning Democrats

were particularly taken with Ms Brainard’s

monetary doveishness.

Yet Ms Yellen has many advantages of

her own. She is an accomplished econo-

mist, originally specialising in labour eco-

nomics, and is the president of the Ameri-

can Economic Association, the field’s

pre-eminent learned society. (There are

also few better-liked people in the profes-

sion; wonks turn up their collars in hom-

age to one of Ms Yellen’s sartorial quirks.)

She was a highly competent chairwoman

of the Fed between 2014 and 2018, commu-

nicating the central bank’s intentions

clearly in advance so as not to take inves-

tors by surprise. Her experience at the Fed

may prove useful given that the central

bank and the Treasury must continue to co-

operate to help the economic recovery

The Fed’s former chairwoman will lead

the Treasury. What does she stand for?

Janet Yellen

Something for

everyone