Is the Fed Fueling Inequality?
In case you hadn't noticed (and chances are you haven't... with the warm summer weather, beach books have probably been at the top of most peoples' reading lists), a debate has been raging in the financial press about whether the Federal Reserve and its monetary policies have exacerbated societal inequality in the U.S.
The leading voice in the "Yes, it has," camp is Karen Petrou, who published a book earlier this year titled Engine of Inequality: The Fed and the Future of Wealth in America. She then followed up with a July op-ed in The New York Times, "Only the Rich Could Love This Economic Recovery."
On the other side of the argument is Martin Wolf, chief economics commentator at the Financial Times, whose recent op-ed entitled "Monetary policy is not the solution to inequality," riffed off a report by the Bank for International Settlements that concluded, "Monetary policy is neither the main cause of inequality nor a cause of it."
Petrou's argument, at its core, is that the Fed's decade-long, post-financial crisis, pandemic-times policy of keeping interest rates ultra-low (negative, in fact, when inflation is taken into account) has inflated the value of financial assets and real estate without stimulating broad economic growth.
Stocks and bonds are disproportionally owned by the wealthy. According to data from the Fed itself, in the U.S. 54% of equities are owned by the top 1%. And since the 2008 downturn (and the Fed's subsequent stimulus efforts), the increase in the value of financial assets has been 10 times the growth of GDP – which until recently had languished at levels not seen since the end of World War II. The well-being of most people outside the 1% is tied more to economic growth. The math, Petrou writes, is pretty simple: "When financial rates of return are above that of broader economic growth, inequality speeds up in a cumulative way."
As a result, Petrou said in a June Financial Times op-ed of her own, "The U.S. central bank has played a direct, if wholly unintended, role in driving income and wealth inequality to astonishing heights."
("Unintended" is an important word here. There is no indication the Fed is a knowingly malevolent actor. Fed Chairman Jerome Powell has spoken publicly about the Fed's commitment to principles of inclusion and diversity.)
There are a couple of other ways in which Fed policy affects rich people and disadvantaged populations inequitably. Those at the lower end of the wealth ladder tend to put what money they accumulate in savings accounts, where the interest they have received for the past decade has been close to zero in nominal terms, and negative in real terms. It's those at the upper end who tend to invest in higher-yielding assets.
Also, to the extent the Fed's easy money policies – low rates and aggressive bond buying, known as quantitative easing – end up spiking inflation, the effect will be more pronounced on the poor, who tend to spend a greater proportion of their income and wealth on consuming goods and services, which rise in price in inflationary environments.
"Inflation is already a painful tax on low, moderate and middle-income households," Petrou wrote in the Financial Times.
The counter argument essentially asks: What should the Fed have done differently in the wake of the two seismic shocks we suffered through in the past 10 years – the global financial crisis and the Covid-19 pandemic?
Martin Wolf put it this way in the Financial Times.
"It would have made no sense to adopt a deliberately more restrictive monetary policy solely in order to lower asset prices. This would have reduced activity and unemployment. That is the worst thing that could happen to people who are dependent on their wages for their livelihoods."
"How would the majority of people, who own almost no assets, be better off because billionaires were a bit poorer? It would be mad for central banks to cause slumps in order to lower asset prices."
I tend to agree with Wolf. But I worry that widening disparities in wealth and income could pressure political leaders to adopt fiscal (tax and spending) policies and impose regulations that slow growth and end up reducing overall well-being.
The White Hat/Black Hat debate over monetary policy is only one aspect of an ongoing conversation about whether (and if so, to what extent and in what ways) the financial system that powers our capitalist economy is an agent of, or a purveyor of, systemic inequality.
Related examples include claims by Emery University law professor Dorothy A. Brown in her book, The Whiteness of Wealth, that the tax system impoverishes Black Americans. Or by Destin Jenkins, University of Chicago assistant professor and author of The Bonds of Inequality, which claims the municipal bond market represents "infrastructural investment in whiteness" and that "the history of inequality in twentieth-century America is, in part, the history of municipal debt."
The debate over whether the financial system is driving inequality to new heights is, I believe, a distraction from what needs to be our singular focus: on shared prosperity and on how the financial system can help support that outcome.