Easing out of inequality?
Next week, the Federal Open Markets Committee of the Federal Reserve is expected to announce the end of its third round of quantitative easing. QE3, as the policy is known, was the central bank’s third round of extraordinary bond purchasing focused on bringing down long-term interest rates to help boost economic growth. The anticipated end of the program has reignited debates about the effectiveness of the policy. And in light of Fed Chair Janet Yellen’s speech last week, many have focused on the effects of QE3 on inequality in particular.
In Dealbook at The New York Times, financial writer and former investment banker William D. Cohen argues that the Fed’s low interest rate policies have favored the rich over the poor in the tepid economic recovery following the Great Recession. Cohen notes that low interest rates have enabled the wealthy to enjoy the fruits of rising stock prices while crushing retirees and others who are living on fixed incomes or relying on their savings to make ends meet. In an interview last weekend, Eric Rosengren, the President of the Federal Reserve Bank of Boston (which hosted Yellen’s speech) acknowledged that quantitative easing did increase inequality by boosting stock prices. But he added that by boosting overall economic growth, QE3 on net decreases inequality. As he put it, “the one thing that really contributes to income inequality is to have no income at all.”
One way to think about this question is to consider an alternative scenario in which the Federal Reserve didn’t implement quantitative easing. As James Pethkoukis at the American Enterprise Institute points out, the U.S. economy might now resemble the current situation in most European Union economies, where a triple-dip recession looms in some countries. Even if the situation was slightly less grave, it would still in no way resemble the steady if slow U.S. economic growth over the past several years.
Pethokoukis says that there’s another scenario in which the Federal Reserve could have implemented policy that more directly increased the earnings of a broad swath of the population. He mentions a “helicopter drop” of money, where the Fed prints money to fund checks sent directly to American households from the U.S. Treasury. He says such a move might have decreased inequality relative to the chosen QE path, but would it have arrested the increase in income and wealth inequality? Given that the rise in economic inequality has been going for decades and continued over several periods of recessions and expansions, it seems unlikely.
Jared Bernstein argues that a central bank can reduce inequality, but only after a prolonged and consistent campaign to promote full employment. The effects of monetary policy on inequality need to be considered over a period longer than just one recession or expansion. The Federal Reserve is assigned a mandate by Congress to promote maximum employment in its policy setting. Perhaps the central bank should consider its commitment to that goal given unacceptably high unemployment today. For the Federal Reserve to reduce inequality, it’ll take a change in mindset.