(Bloomberg Opinion) — Federal Reserve officials often decry the unprecedented disparity between the wealthy and poor. But they usually avoid mentioning the direct role they have played in widening these financial disparities over the past few decades.
Expect this week’s Jackson Hole symposium to be a prime example of this dual reality, especially because its stated topic is “Macroeconomic Policy in an Uneven Economy.” The goal sounds good and noble, and without a doubt Fed officials are arguably talking more than ever before about inequalities of all kinds in the U.S. economy. But the problem is, the longer they continue ultra-easy monetary conditions, the more the richest families benefit disproportionately. And without different fiscal policies from Washington, the poorest families largely miss out directly.
In other words, all things being equal, the Fed is actively making the wealth gap more pronounced.
For some context, its policy of keeping interest rates near zero and buying trillions of dollars of bonds has suppressed volatility and turbocharged asset prices, fueling some of the biggest stock and bond returns in history. As of March, the top 10% of wealthiest U.S. households owned an unprecedented 89% of all corporate and mutual fund shares outstanding. That compares with 84% 15 years ago, before the central bank embarked on any of its quantitative easing programs, Fed data show.
The role of central banks in fueling asset returns is no mystery, nor is the disproportionate benefit of those gains for top-earning families. Fed members have argued that the benefits substantially outweigh the increase in inequality. Easy financial conditions allow companies to more cheaply finance themselves, invest in new businesses and equipment and hire more employees. It fosters growth and general prosperity, which is how all this is supposed to trickle down to all workers, regardless of income.
But a recent study casts this dynamic in a different light. The February research, “The Savings Glut of the Rich” by Atif Mian of Princeton University, Ludwig Straub of Harvard University and Amir Sufi of the University of Chicago, suggests that the lopsided distribution of wealth is more than a social issue; it’s actually dissuading productive investment. Instead, the study shows that wealthy people are parking more of their cash in debt funds, which account for a significant proportion of lending to U.S. governments and households. Basically, the U.S. and lower-income families are becoming more indebted, rich people have more money tied up in debt funds, and less money goes toward fostering innovation and prosperity.
The Fed’s annual meeting, which is being held remotely for the second year in a row, is the main event of the week, watched by traders and analysts and policy makers worldwide. The big question is when the central bank will start cutting its $120 billion of monthly bond purchases, which Chair Jerome Powell probably won’t answer. But it may be more interesting to see how Fed officials frame the debate of inequality, the main theme of the conference.
As Steven Major of HSBC Holdings Plc put it in a note last week: “Investors should make sure it is not just chatter about the taper that they pay attention to. Rising economic inequality matters to bonds because it is one of the longer-run structural drivers that has contributed to rates being so low.”
Major noted that wealthier families are more likely to invest in bonds than spend their money, and the disproportionate growth in these households’ assets has been a big driver of demand to buy debt. But there’s another way to look at this same story: The more money the wealthiest individuals have, the less likely they are to recirculate it and help fuel the velocity of money that’s critical to growth.
Perhaps Fed members will start looking at the widening wealth gap as a more significant risk to the outlook, not from a social or moral one, but rather an economic one. Central bank policies are doing nothing to curb consumer prices, which are rising at the fastest pace since 2008. Fed members have largely shrugged off inflationary pressures as transitory. Less transitory are some of these deepening wealth dynamics that are slowing the flow of money and potentially crimping growth.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Lisa Abramowicz is a co-host of “Bloomberg Surveillance” on Bloomberg TV.