Is it the Federal Reserve’s fault that some people may be forced to sell their homes?

Have some people forgotten?

As Philip Lowe’s term as chairman of the Federal Reserve came to an end last year, he had a few words to say about monetary policy.

He has said repeatedly that there are probably better ways to manage inflation and that we should take the time to think about them.

He raised the issue before a parliamentary committee in Canberra. He said that in our current system the burden of controlling inflation falls very heavily on some sections of society and lightly on others.

“It’s a serious problem and I was a bit disappointed that the RBA Review didn’t take it up and address it,” he told them.

In his recent speech at the Anika Foundation, he floated the idea of ​​giving an independent institution limited powers over new fiscal instruments, which could help manage inflation in conjunction with the RBA, in a way that would spread the burden of inflation control more evenly across the community.

“Going in this direction is not easy, but innovative thinking can help us achieve better results,” he said.

“(G)iven the constraints of monetary policy… you know, what we do affects people very unevenly, I think we should be striving for something better.”

Now let’s move on to the present.

On Thursday last week, Michele Bullock, the Governor of the RBA (who replaced Dr Lowe as Governor in September last year), gave her own speech at the Anika Foundation.

Ms Bullock told attendees she recognised that higher interest rates were causing pain for some people at the moment, but the RBA’s job was to bring down inflation because that was also causing pain.

She added that the RBA recognises that more Australians than usual are now turning to community organisations for help, and that lower-income borrowers are over-represented in the group of people “really struggling” and that some people may be forced to sell their homes.

And she didn’t say these things cheerfully. She stated facts. That’s how things work in the current system she inherited.

But online, where Ms Bullock’s comments have been met with anger by many, she has been met with harsh criticism as if she took pleasure in people’s suffering.

Have we forgotten what Phil Lowe was talking about when, towards the end of his career, he felt more comfortable and able to speak his mind freely?

The monetary policy environment has changed

Where is the contempt for our major political parties and regulators?

Aren’t they responsible for ensuring that the problems of this system, and the inequalities in our housing policy and tax system that underlie it, only get worse over time?

Tim Hext, head of government bond strategy at Pendal Group, recently argued that monetary policy must operate in a very different environment to that of the past.

“The Federal Reserve has always recognized that interest rates are an inflexible instrument, but the massive changes in our economic structure over the past decade have made them even more inflexible,” he wrote.

“The reality is that monetary policy is now more than ever a wealth redistribution policy in Australia than simply an economic policy.”

By “redistribution of wealth” he means the way wealth is redistributed from the young and poor to the rich.

He said that among the many issues the RBA board considers at its meetings, the changing face of monetary policy should become the subject of long-term thinking.

But he didn’t tell the RBA anything it didn’t already know.

Last year, Philip Lowe warned that, given the changes taking place in the global economy, returning to a world in which inflation stayed within very narrow bands could be difficult.

“The increasing incidence of supply shocks, deglobalization, climate change, energy transition and demographic change mean either steeper supply curves or more volatile supply curves,” he said.

Remember, he also thought we should strive for better and fairer ways of managing inflation.

Ms Bullock, a month before taking up her post as RBA governor, warned that uncertainty over climate change could make it harder for central banks to manage inflation in the future.

It is clear that the RBA has made a decision to think long-term.

But the RBA has no power to reform the tax system, build houses for people or properly tax the use of our natural resources, which our politicians stubbornly hand over to multinational corporations at banana republic prices.

The main policy tool is raising and lowering interest rates.

Is it time for Lowe?

But that doesn’t mean the RBA has reason to worry.

Many economists have criticised the RBA for mistakes made in recent years, including failing to forecast future actions during the lockdown and delaying raising interest rates after inflation rose.

Why did the RBA wait until weeks before the May 2022 federal election to raise interest rates when core inflation was already above 5 per cent?

As the chart below shows, the Albanian government came to power at the very beginning of the 2022 interest rate hike cycle, when the RBA board had just raised the target interest rate from 0.1 to 0.35 percent.

Treasurer Jim Chalmers inherited an economy with runaway inflation and the RBA has since raised interest rates 12 more times, to 4.35 per cent, in an attempt to curb inflation.

The emergency low interest rates introduced by the RBA during a period of extreme uncertainty and anxiety related to COVID-19 also contributed to the subsequent rise in house prices, with dire social consequences.

But let’s throw in a few other things, because the RBA is not the only institution you can complain about.

The Morrison government’s decision, during the pandemic, to allow Australia’s largest businesses to keep hundreds of millions of dollars in government support they didn’t need, while millions of people were pushed back into poverty by having their financial support taken away, was appalling.

Albanian authorities are now pushing to grant more permits to mining companies to extract and burn more fossil fuels, as if this had no impact on climate change, something the RBA says it is concerned about.

Some economists have also criticized the government for its recent financial support for households, saying it makes it harder for economists to forecast inflation and thus curb it.

This is a mess.

But beneath all this lies a question about the architecture of our politics.

Over the past few years, many experts have called on Australian political leaders to take action on the unfairness of our tax system, housing policy and immigration laws, given the interconnectedness of monetary and fiscal policy.

What needs to happen for policymakers to begin to look at alternative courses of action, as Phil Lowe has suggested, so that the burden of controlling inflation is felt more evenly across society?