Do Central Banks have a new policy objective?
Since the early 1980’s it is widely accepted that Central Banks have had two clear objectives:
- Price stability – essentially means keeping inflation at or close to 2% target rate – we are currently much higher than this (5.5% in the UK) as anyone who has read any financial press this year will know!
- Full employment – making sure economies are as close to full employment as possible – full employment is basically where everyone who wants to work has a job.
One of the biggest global stories since Central Banks stepped in to save the world from the financial crisis in 2007-2009 has been the widening of the ‘Inequality Gap’.
Put simply – those who have capital have benefitted from Central Banks pushing asset prices higher so the rich have got richer! This has obviously increased the gap between rich and poor and widened the ‘Inequality Gap’ as mentioned above.
In 2009, 0% of central bank speeches mentioned ‘inequality’ now this has moved to 8%. It is clearly on the minds of central bankers.
What does this mean for risk markets?
Well it probably means that Central Banks will be less likely to step in to support markets if we see significant drawdowns in the future. They have been vocal on this topic in the minutes of recent policy meetings. They will remain committed to controlling inflation which hurts the less wealthy more as they have less capital for discretionary spending and a lower capacity to deal with a higher cost of living.
Summary
There is no doubt that globally, inequality has been increasing and we are well overdue a closing of the gap between rich and poor. The fact that at the end of 2020 the richest 1% owned 46% of the world’s wealth is not sustainable and one could argue has fuelled the rise of populist politics on both the far right and far left sides of the political spectrum.
Central banks have stated they are not going to step in to ‘save’ markets so the risk premium demanded for investing is higher now than it has been since March 2009.
Opinions constitute our judgement as of this date and are subject to change without warning.