The Wall Street Journal
By: Michael S. Derby
April 18, 2013
Federal Reserve stimulus aimed at spurring growth will likely grow more powerful as the housing market recovers further, but the trends that have fueled income inequality aren't likely to change much, a U.S. central bank official said Thursday.
"The accommodative policies of the [Federal Open Market Committee] and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction," Fed governor Sarah Bloom Raskin said.
"As house prices rise, more and more households have enough home equity to gain renewed access to mortgage credit and the ability to refinance their homes at lower rates," she said.
"I think it is possible that accommodative monetary policy could be increasingly potent" as the housing market picks up, Ms. Raskin said.
The official said Fed staffers estimate house price increases of 10% or less from current levels would be enough to help around 40% of homeowners who owe more on their homes that the properties are worth to get back into the black. If more households regain a positive equity position, it will help unclog some of the traditional channels monetary policy operates in, which will over time make the stimulus better able to lift growth, Ms. Raskin said.
The central banker is a voting member of the monetary policy setting FOMC. Her comments came from the text of a speech prepared for delivery before a gathering held by the Levy Economics Institute of Bard College in New York. The bulk of Ms. Raskin's speech was devoted to trying to understand how wealth and income inequality played a role in creating the financial crisis, and how it might be affecting a recovery that has thus far been weak despite four years of mostly positive momentum.
The official allowed that the issue isn't well understood by mainstream economists. But she said the evidence suggests inequality very likely did play a significant part in the downturn. Ms. Raskin pointed to a long standing and widening gulf between top earners and the rest of the nation. Those who saw incomes stagnate relied more on debt and homeownership to cover the lack of rising wages, and when housing prices began to fall, these households were exposed and without sufficient resources to withstand the storm.
As housing prices turned south, "not only did [these households] receive an unwelcome shock to their net current wealth, but they also undoubtedly have come to realize that house prices will not rise indefinitely and that their labor income prospects are less rosy than they had believed," Ms. Raskin said.
"As a result, they are curtailing their spending in an effort to rebuild their nest eggs and may also be trimming their budgets in order to bring their debt levels into alignment with their new economic realities," the official said. Add the unemployed to that mix, and it isn't much of a surprise the economy has struggled to recover, the official said.
Ms. Raskin also said that even as monetary policy is likely to work better when housing picks up further, it is unlikely it will be able to do much right now for wealth and income inequalities. She said "it is unlikely that cyclical improvements in the labor markets will do much to reverse these trends."