Should the Fed Worry about Wealth Inequality?
The Fiscal Times
By: Robert Frank
March 26, 2013
The gap between the wealthy and the rest of America is a hot-button issue in Washington-especially in the White House and Congress. And especially during battles over taxes.
But recently, the Federal Reserve has also taken a greater interest in the topic. And some analysts are asking whether financial inequality in the U.S. might soon become part of the Fed's decision-making process.
In a recent research note, Credit Suisse research analysts Neal Soss and Dana Saporta wrote that "the issue of growing income and wealth disparity in the U.S. is gaining stature among Federal Reserve officials and may become the next important macroeconomic variable for monetary policy."
Some on the FOMC, they said, assert that inequality "undermines the ability of the economy to grow sustainably and efficiently" and could lower the long-term growth rate.
Three members of the Federal Reserve Board -- Sarah Bloom Raskin, Elizabeth Duke and Janet Yellen -- have given speeches relating to inequality or two-speed labor markets in recent weeks.
The question is whether the Fed could or should take inequality into account in setting policy.
As the Credit Suisse note points out, the Fed "has neither the authority nor the tools to directly address such inequality." So ultimately the Fed may be powerless to do anything about inequality, even if it's more concerned.
What's more, there is still widespread disagreement among academics and economists on the exact causes of inequality. Is it globalization or tax policy or the decline of labor unions or CEO pay or Wall Street or "winner-take-all" markets? Or some combination of all?
True, the Fed may not be able to directly reduce inequality. But some economists say the Fed has done its part to increase inequality in recent years. Monetary easing has benefited asset prices. And the top 1 percent owns an outsized share of assets -- especially stocks.
So in re-inflating stocks, the Fed has contributed to the uneven recovery. The wealth of the wealthy is largely back to precrisis levels, while the rest of America is still climbing back. The Bank of England released a report this summer stating that 40 percent of the stock-market gains from the BOE's quantitative easing program had gone to the wealthiest 5 percent of households.
Economist Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality."
Of course, some argue that the Fed has also boosted housing values and the wealth of the rest of America. By many measures, both income inequality and wealth are lower today than they were in the late 1990s.
Yet when looking at the causes and cures of inequality, perhaps the Fed should also look at itself.
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