The Federal Reserve grapples with the links between monetary policy and income inequality

0
74


Federal Reserve Chairman Jerome Powell acknowledged economic inequality in the United States on Wednesday, but said monetary policy tools can only do much to narrow the income gap.

Research within the Fed itself, however, suggests that the central bank could be more effective when policymakers consider income inequality while designing policy tools.

p class’ ‘canvas-atom canvas-text Mb(1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type ‘text’ content’ “Inequality is something that has been growing with us for more than four decades and it’s not really related to monetary policy,” Powell said at a press conference after the Announcement by the Federal Open Market Committee holding rates close to zero.  “Data-reactid” “18” “Inequality is something that has been with us growing for more than four decades and it is not really related to monetary policy,” Powell said at a press conference after the Federal Open Market Committee announced that it was keeping rates close to zero.

Powell attributed the gap between the highest earners and the lowest earners to globalization and technological trends that have created a greater skill gap. Powell said higher education would be needed to get better-paying jobs, leaving the poorest earners without a way to increase pay if education and new skills are inaccessible.

“If you’re on the right side of these trends, then these things are good for you,” Powell said. “If you’re not, then your wages will stagnate.”

The Fed’s 2016 consumer finance survey shows income stagnation among the lowest earners relative to the highest earners.

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)’sm ‘type’ ‘text’ content’ ‘The Fed’s data from its Survey of Consumer Finances shows that since the financial crisis the richest families have seen faster income growth than the poorest families. In the period following the 2009 to 2016 recovery, the median family of the poorest 20% of wage earners saw their income grow by only 6%. The richest 10% saw their income increase by 9% over this period. In the period following the 2009 to 2016 recovery, the median family of the poorest 20% of wage earners saw their income grow by only 6%. The top 10% saw their income increase by 9% over this period.

h2 class “canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm “type ” text” content”Prioritairing low-income workers “data-reactid”Prioritizing low-income workers

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type’ ‘text’ content’ ‘A 2018 paper from the Federal Reserve Board’s Isabel Cair and Jae Sim, however, argues that monetary policy should take income inequality into account when designing its policy tools – especially in times like today when the target federal funds rate is supported at zero. “Data-reactid’ ’34’ – A 2018 document from the Federal Reserve Board Isabel Cair and Jae Sim, however, argues that monetary policy should take income inequality into account when designing its policy tools – especially in times like today when the target federal funds rate is supported at zero.

Highlighting previous economic research, Cair and Sim note that high-income groups tend to save more than low-income (or in economic terms) groups have a marginal propensity to consume. The authors argue that high-income individuals can “overacculate” financial wealth and maintain high savings rates; low-income people are more likely to spend more of their income just to make ends meet.

This poses a dilemma for the Fed, which wants to largely discourage savings and stimulate consumption (or in economic terms, stimulate aggregate demand) to fuel an economic recovery.

The suggestion: an “optimal” monetary policy that prioritizes reducing unemployment to improve the well-being of low-income earners – even at the expense of welfare losses for high-income people with financial assets.

« [T]The results suggest that monetary policy may have distribution consequences,” the authors write.

The paper adds that policymakers should “provide a sufficient degree of monetary accommodation during economic downturns” to break the link between high income inequality and insufficient overall demand.

h2 class “canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm “type ” text” content”Running the economy ‘hot’“data-reactid”Managing the “hot” economy

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type ‘text’ content’ Vincent Reinhart, a former Fed economist who advised the Federal Open Market Committee, said Yahoo Finance Thursday that the Fed should be aware of how its monetary policy can asymmetrically affect people along the income spectrum. “41” data-reactid “41”-Vincent Reinhart, a former Fed economist who advised the Federal Open Market Committee fixing policy, told Yahoo Finance on Thursday that the Fed should be aware of how its monetary policy can asymmetrically affect people along the income spectrum.

“The monetary transmission mechanism goes through the markets,” said Reinhart, who is now chief economist at BNY Mellon Asset Management. “It inflates stock prices. And stock prices are the value of something that is held unevenly.

Powell was cautious in describing the Fed’s role in narrowing the income gap, which is not part of the Fed’s congressional-mandated objectives of price stability and maximum employment.

The document also notes that monetary policy “cannot eliminate income inequality,” adding that fiscal policy may be better suited to close the growing gap.

8 the recovery has enlightened policymakers in favour of letting the labour market function “hau” through long periods of accommodative monetary policy, which has had the effect of pulling into marginalized, low-income workers in higher-paying jobs.  “data-reactid” -49″-But the Fed’s experience with the post-2008 recovery has enlightened policymakers in favour of letting the labour market run “warm” through long periods of accommodative monetary policy, which has led to the lure of marginalized low-income workers to higher-paying jobs.

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type ‘text’ content’ Last year, the Fed launched a listening tour as part of a broader effort to review its monetary policy framework. A conclusion of the “Fed Listens” circuit in 15 events detailed the many conversations with workers and employers who warned that the central bank’s overall vision of “maximum employment” could neglect stagnation among low-income workers. A summary of the 15-event “Fed Listens” circuit detailed the many conversations with workers and employers who warned that the central bank’s overall vision of “maximum employment” could neglect stagnation among low-income workers.

“One of the benefits of these events has been the importance of maintaining a strong labour market, especially for people in low- and moderate-income communities,” Powell said in the report.

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type’ ‘text’ content’Brian Cheung is a reporter covering the Fed, the economy, and banks for Yahoo Finance. You can follow him on Twitter @bcheungz.“data-reactid”Brian Cheung is a reporter covering the Fed, The Economy and Banks for Yahoo Finance. You can follow him on Twitter @bcheungz.

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type’ ‘text’ content’Read the latest financial and business news from Yahoo Finance “data-reactid” “59” …Read the latest financial and business news from Yahoo Finance

p class ‘canvas-atom canvas-text Mb (1.0em) Mb(0)-sm Mt (0.8em)-sm ‘type’ ‘text’ content’Follow Yahoo Finance on Twitter, Facebook.nbsp;Instagram.nbsp;Flipboard, SmartNews.nbsp;Linkedin.nbsp;Youtube, and nbsp;Reddit. “data-reactid”Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, Linkedin, YoutubeAnd Reddit.



LEAVE A REPLY

Please enter your comment!
Please enter your name here