Federal Reserve Chair Janet Yellen waded into a debate over the fairness of trade agreements on Tuesday, saying that outsourcing has caused wages to stagnate, while simultaneously opposing proposals to remedy other countries’ allegedly ill-gotten advantages through currency manipulation rules attached to future deals.
Any attempt to address currency manipulation in the Trans-Pacific Partnership could “hamper or even hobble monetary policy,” Yellen said in response to questions before the Senate Banking Committee.
“We should be on guard against currency manipulation,” Yellen said after being asked about the issue by Sen. Mark Warner (D-Va.) But, she said, major economic actors in the G-7 have greed that “monetary policy oriented toward domestic goals, like price stability or, in our case, price stability and maximum employment–this is a very valid use of a domestic tool for a domestic purpose.”
“It is true that the use of that tool can have repercussions on exchange rates, but I really think it’s not right to call that currency manipulation and put it in the same bucket as interventions in exchange markets that are really geared toward changing the competitive landscape to the advantage of a country,” Yellen added.
Sen. Bob Corker (R-Tenn.) also quizzed Yellen about her thoughts on the issue, alluding to the TPP and the possibility of foreign companies or countries being able “to challenge future monetary policy positions by the Fed.” The head of the central bank effectively gave the same answer.
“There are many factors that influence the value of currencies, including differences in economic growth and capital flows and, as you mentioned, monetary policy is a factor that can have an impact on currencies,” she said.
If a central bank lowers interest rates to reduce borrowing costs and spur economic growth, that can cause its host country to become less attractive to people abroad who might have otherwise decided to save money in one of the country’s banks. The reduction in the supply of other countries’ currencies in the central bank’s home country would, in turn, increase the price of foreign exchange, in terms of the bank’s domestic currency, on world markets. That secondary effect of expansionary monetary policy should be considered legitimate and differentiated from direct intervention in foreign exchange markets, Yellen effectively said.
But she did indirectly note, in response to another pair of questions, that trade deals are causing worrying long-term problems in the US.
When asked by ranking member of the committee Sen. Sherrod Brown (D-Ohio.) to explain why wages have stagnated and productivity gains are no longer flowing to workers, Yellen said that “we have seen a significant increase in the share of the pie, or [Gross Domestic Product], that accrues to capital as opposed to labor.”
“Research points to the fact that many labor intensive activities in the global production chain are being increasingly outsourced. And that phenomenon, I think, has tended to push down the share of income going to labor as opposed to capital over the last decade or so,” she said.
Trade deals–including China’s ascension to the World Trade Organization and the North American Free Trade Agreement–have encouraged this trend by reducing tariffs on imports from countries with weak environmental and worker protections, and authoritarian approaches to independent labor organizing.
Yellen added, in response to a follow-up question from Brown, that, in his words, “workers being organized” could factor into structural reasons for a reduced share of national revenue going to labor in the United States.
This increase in income disparity is bothersome to the Fed chair, she noted, as she has done in the past. When asked by Sen. Heidi Heitkamp (D-N.D.) “what keeps you awake at night,” Yellen responded that inequality, among other problems, looms greatly over the US, but was reluctant to “weigh in on things that are really in your domain.”
Yellen also told Sen. Heitkamp that “longer run issues with the federal budget” rank among her insomnia-inducing concerns, in the context of the debt-to-GDP ratio and the cost of caring for an aging population.
But she noted that problems with younger adults also disturb her–particularly student debt, and the millennials’ problems adjusting to a labor market that has been profoundly shaped by the 2008 financial collapse.
