Critics blaming the Federal Reserve for increased income inequality ignore two key factors: the widening wage gap predates the central bank’s low-rate policy, and Fed policy has helped stabilize housing and employment at the lower end of the income spectrum.
A new paper from Brookings Institution economist Stephanie Aaronson, co-authored with San Francisco Fed President Mary Daly and two Fed board economists, finds that added stimulus during times of especially weak labor market activity helps key disadvantaged groups most.
Full employment, higher wages, stronger bargaining power and broader access to jobs—all of these are directly linked to the Fed’s prolonged policy of low interest rates, and taken together they more than offset any inequality growth from a short-run rally in asset prices.
“When the labor market is already strong, a further increment of strengthening provides some extra benefit to some disadvantaged groups relative to earlier in the labor market cycle,” the authors find.
“In addition, we provide some evidence suggesting that these gains are persistent, at least for a while, for some groups, particularly blacks and women.”
Recent patterns in the labor market corroborate this trend. Rather than sparking inflation or a sudden surge in wages, a historically low unemployment rate that has hovered at or below 4% for a year has merely encouraged workers to gradually return to the workforce. Wage growth is finally picking up for the average worker, climbing 3.4% in the year to February.
The black unemployment rate fell to a historic low, although it remains double that of whites. Black labor-force participation has kept rising in the last two years, a further sign that full employment helps narrow race-based employment differences that underpin the wealth gap.
To fully grasp the effects of Fed policy on the real economy, it’s important to remember just how eager many Fed officials and economic commentators were to raise interest rates when the unemployment rate was still as high as 6%, erroneously fearing the ghost of inflation might be lurking around the corner.
Ex-Fed Chair Janet Yellen and some of her colleagues successfully pushed back against that drumbeat, and the economy likely added at least 2 more million jobs because of that simple decision. Not only that, the data suggest the kinds of jobs that are created in the latter stages of recovery benefit those at the bottom of the income ladder most.
“Lower unemployment not only means people have more jobs, it disproportionately benefits the most disadvantaged in the labor market,” wrote Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “The job gainers are disproportionately black, Hispanic, people with less education, people with disabilities, and people with criminal records.”
Put differently, because historically disadvantaged groups tend to come last in line when it comes to new employment opportunities, ensuring a vibrant labor market, in part through low interest rates, is the best way to make sure the people who need them most get those jobs.
Full employment, higher wages, stronger bargaining power and broader access to jobs—all of these are directly linked to the Fed’s prolonged policy of low interest rates, and taken together they more than offset any inequality growth from a short-run rally in asset prices, such as the stock market
The Fed’s recent decision to pause, and potentially stop, raising interest rates may be a sign that policy makers are finally convinced of an ongoing employment recovery is unlikely to spark inflation. Let’s hope that realization has not come too late for America’s struggling workers.
Never mind the irony that the tut-tutting about the negative effect of the Fed’s prolonged low interest rate policies are primary beneficiaries of inequality.
Perhaps the most disingenuous argument coming from this camp is that Fed policy has boosted U.S. inequality by lifting the prices of financial assets like stocks, owned primarily by the wealthy, while only modestly boosting wages, on which most Americans rely for living.
This is a convenient misrepresentation of the true culprit for inequality. A number of factors — including falling union membership and thus weaker bargaining power for labor, alongside tax policies that often benefit the super wealthy — have conspired to keep wages down for four decades.
That was well before the Fed’s policy of ultra-low rates came into being over the course of the Great Recession of 2007-2009.
Those who target the Fed for exacerbating inequality are also overlooking a lot of important research showing easy monetary policy has hugely benefited lower- and middle-income Americans by putting a ceiling on the surge in unemployment that followed the last downturn and, importantly, helping to stabilize a housing market that was at the core of the crisis — and where many American families hold the bulk of their wealth.