Left to right, Mark Carney, Ben Bernanke, Jean-Claude Trichet
We're getting evidence today, and again tomorrow, that illustrate the juggling acts of central banks and highlight the issue of whether their focus should be solely on inflation or, as I believe, on jobs, as well.
It's a tough issue, and at times murky, but it's arguably more important than ever in this era of high global unemployment that shows no signs of easing as economies slow and fears of another recession mount. Federal Reserve chairman Ben Bernanke calls it a "national crisis," and rightly so.
The United States is grappling with an official jobless rate that tops 9 per cent, while European economies are struggling under rates that range up to about 20 per cent in the worst cases. In Canada, the jobless rate stands at 7.3 per cent, amid projections it will remain above the 7-per-cent mark for a long stretch.
And then there's the issue of much higher youth unemployment, raising fears of a lost generation if in fact the United States and Europe are threatened by a lost decade.
The European Central Bank held its key rate steady at 1.5 per cent today, ignoring calls for an immediate rate cut and illustrating again its focus on inflation. The ECB has already raised rates twice - yes, during a raging crisis - in what is now seen as a policy blunder as the euro zone teeters on the brink of another recession.
True, 3-per-cent inflation is unwelcome news, worse in that it's up from 2.5 per cent. But, then again, one in five Spaniards is without a job, and the overall unemployment rate in the euro zone is at 10 per cent. Thus, the juggling act, but also why a dual mandate could help a continent deep in crisis.
Tomorrow, when the key U.S. jobless report is released, there will be even more evidence of the difficulty of finding jobs for the millions thrown out of work during the financial crisis and recession. Statistics Canada also releases its monthly employment report tomorrow.
In the case of the Federal Reserve, however, there is no question. The U.S. central bank's mandate, to make a long sentence short, is to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
The issue comes down to this: Stable, low inflation supports the economy and employment. But there are times when the priority should be inflation and times when it should be jobs. And, as Mr. Bernanke said earlier this week, "we are much further from full employment than we are price stability."
The Fed's dual mandate is being attacked by some Republicans who think the U.S. central bank should act more like the ECB. But a mandate that includes jobs has its prominent defenders, as well.
It's clear, but not so clear depending on interpretation, where the ECB and, for that matter, the Bank of Canada are concerned. And the ECB has a much tougher act on its hands.
The primary objective of the ECB's monetary policy is "to maintain price stability," and it aims for an annual inflation rate just shy of 2 per cent. But the ECB and the national central banks are also supposed to support the general economic policies of the EU, whose treaty says are "a high level of employment and sustainable and non-inflationary growth."
Under Jean-Claude Trichet, who is retiring as ECB chief and whose last official act is today, the central bank has put the spotlight on the latter despite the fact there are 15.7 million people without work in the euro zone and 22.8 million in the wider EU.
Similarly, the Bank of Canada's focus is squarely on inflation, though it still has a heart. Canada's central bank says its objective is to "enhance the well-being of Canadians by contributing to sustained economic growth, rising levels of employment and improved living standards," and it strongly believes that the best way to do this is by "giving Canadian households and businesses confidence in the value of their money." So its inflation target, by agreement with the government, is an annual rate of 2 per cent.
Having said that, the Bank of Canada Act says this: "Whereas it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada …"
Indeed, Bank of Canada chief Mark Carney has said that he plays a role in such general economic well-being, and there's no suggestion that Mr. Carney, one of the best governors Canada has had, isn't keeping his eye on the jobless rate.
The suggestion is that in the wrong hands, a single mandate can be a dangerous tool. Witness the European Central Bank or, for that matter, the Bank of Canada in 1990, when there were no inflation targets but it was nonetheless bent on zero inflation, so much so that it drove the bank rate, then the benchmark, above 14 per cent, and, in turn, the jobless rate to about 12 per cent.