Does Fed Policy Make Inequality Worse?

Is the Fed afraid to raise interest rates? That was the subject of Marketplace's interview with former Fed and ECB insider Athanasios Orphanides.

It seems to me that this question bears a strong resemblance to other questions which answer themselves.

Is the sky blue?
Does a bear shit in the woods?
Is the Pope catholic?

The Fed is also afraid to unwind its 4.5 trillion dollar balance sheet. It is easy to forget here in the "new normal" just how abnormal things are in year 19 of the Bubble Era. 

The more interesting question is does Fed policy make wealth and income inequality worse?

You might, with considerable justification, consult the short list above to find the answer. But Ben Bernanke, in pondering this important question on his blog, demonstrated once again that Flatland as I've described it is not a figment of my imagination, or yours.

Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear.

More research will be needed to untangle and measure the many channels through which these effects are transmitted. But the (uncertain) distributional impact of monetary policy should not prevent the Fed from pursuing its mandate to achieve maximum employment and price stability, thereby providing broad benefits to the economy. Other types of policies are better suited to addressing legitimate concerns about inequality.

Bernanke's answer clearly did not satisfy the guys who write the Not Quant blog, who had me laughing out loud. I will quote from Oops! Philly Fed Admits QE widens inequality (hat tip Tim Iacono).

This is great stuff.

Once again, the Federal Reserve proves that it’s the last one to know everything that we knew already. Today’s stunning announcement:  The Philadelphia Fed admits they (“may have”) made the wealthy wealthier and Main Street poorer.

Oops.  Sorry America.

The Philly Fed insists that “redistributing wealth” to the wealthy isn’t the main idea, but just a potential side effect of stimulus that they can’t do much about (You can read the Fed paper here).

“Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth,” …

“However, it is probably impossible to avoid the redistributive consequences of monetary policy”.

We’re shocked. Shocked, we tell you.

 

It turns out that handing out free money,  buying worthless assets at face value and allowing a small cabal of private banks the sole right to access your magic free-money window, “may” have given some financial advantages to “one segment of the population”.  But that’s just a side effect of saving the “economy”.

Of course, it’s not just the bankers.  The 1% also happen to hold vastly more financial assets than the lower 99% — so they may directly benefit from financial asset-inflating monetary policy...

[Skipped some graphs and discussion]

It’s great to see the Federal Reserve finally state this possibility publicly, unfortunately it doesn’t mean they’re about to change their minds.  In the eyes of the Fed, the ends justify the means.  If society as a whole is“better off” then it’s apparently “okay” that the poor are poorer and the rich are richer:

It might be also true that the gain to society’s well-being from stabilizing the overall economy is greater than the loss coming from associated redistributive effects, in which case we could safely focus on the overall effects and ignore the redistributive effects.

How convenient: Focus on the winners, not the losers. Or something like that.

But the rose-colored glasses have only just been donned:

One could also argue that, in the long run, the redistributive consequences of monetary policy might average out. In other words, if the same type of households that tend to gain from monetary policy during economic expansions also tend to lose from monetary policy during recessions, then over time the average effect could be a wash.

Got that?  The Fed is suggesting that while the rich “may” get richer during boom times,  recessions equalize wealth inequality.   So in a perfect world it might all even out.

First, let’s take a moment to note that the Fed  just admitted that deflationary forces are wealth equalizers and inflationary forces benefit the rich.    That’s noteworthy.

But let’s also note that the Fed’s money printing creates endless artificial booms, and limits recessions.  Ergo, the Fed reduces the possibility of equalization and creates a continuous money transfer mechanism from poor to rich – as they note:

…There is a good chance that the redistributive effects do not average out because business cycles are known to be asymmetric —expansions tend to be long and moderate, while recessions tend to be short and sharp.

Exactly.  And why are recessions so short?   Recessions “tend to be short and sharp” because the entire modus operandi of Federal Reserve policy is to shorten recessions and lengthen expansions.

In other words, the Fed is admitting that it’s core policy thesis which is inherently inflationary makes the rich richer and the middle-class poorer.

But as long as the “economy” is doing better, it’s all good.   Right?

Yes, it's all good. These Not Quant guys deserve your support. After all, they're trying to live in the Real World, which is always a struggle.

Comments

[rumor]

Even these half-assed admissions and sort-of realizations only ever come out from a retiree. No one's ever interested in questioning the basis of their power when they're in office. It reminds me of the endless parade of law enforcement chiefs who rail against the war on drugs once they've stepped out the door, except in those cases at least you have a bald-faced admission.