Should The Fed Consider Income Inequality When Setting Monetary Policy?

S&P Global‘s Report

Date: 01 Sep 2016 · 23:09

The biggest criticism of the Federal Reserve's response to the recent financial crisis is that it exacerbated the country's already historic level of income inequality

Beth Ann Bovino, S&P Global's U.S. Chief Economist: “Without the third round of QE that the Fed implemented in the fourth quarter of 2012, about 1.9 million fewer jobs would have been added to the world's biggest economy”

Because the effects of monetary policy vary, it would be unreasonable to expect a loosening of monetary policy to benefit everyone equally

Perhaps the biggest criticism of the Federal Reserve’s response to the recent financial crisis, specifically regarding its asset-purchasing program known as quantitative easing (QE), is that it exacerbated the country’s already historic level of income inequality.

But should the potential widening of the wealth gap be a consideration for central bankers when they set monetary policy?

The answer to that question, if there is one, is less than straightforward, according to an article published by S&P Global, titled “Should The Fed Consider Income Inequality When Setting Monetary Policy?”

“While it’s true that the short-term effects of QE, and the loosening of monetary policy overall, likely helped those at the top more than others, the longer-term benefits have been more widespread,” said S&P Global’s U.S. Chief Economist Beth Ann Bovino. “In fact, we calculate that without the third round of QE that the Fed implemented in the fourth quarter of 2012, about 1.9 million fewer jobs would have been added to the world’s biggest economy, and, using Okun’s Law, U.S. real GDP would have been US$ 350 billion lower.”

“Amid ample evidence that increased wealth concentration may make monetary policy less effective, we don’t believe it’s prudent for the Fed to consider the impact of monetary policy on income inequality, but, rather, that it would be wise for central bankers to consider the impact of income inequality on monetary-policy effectiveness,” said Ms. Bovino.

Because the effects of monetary policy vary, it would be unreasonable to expect a loosening of monetary policy to benefit everyone equally, and the fact that moves such as QE might improve the lot of some more than others is hardly a reason for central banks not to do their basic job of supporting the macro economy.

This could matter, given the Federal Open Market Committee’s lower estimated “neutral rate,” policymakers have less room to use traditional monetary policy during a downturn, suggesting that QE (or another alternative form of easing) may still be in the cards.