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Will the Fed’s efforts to boost the economy only benefit the wealthiest?

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In the next few weeks, Ben Bernanke and the Federal Reserve will ponder whether to give the U.S. economy a jolt by engaging in another round of "quantitative easing" — buying up financial assets to inject more money into the economy. There's a lot for Fed officials to mull over. Does the economy need the lift? Will more easing actually work? Could it pose risks to financial stability?

And here's another consideration: How might a third round of quantitative easing (QE3) affect the already-wide levels of inequality in the United States? Across the Atlantic, the Bank of England has come in for some criticism this week after it released a new report showing that its own quantitative easing efforts have disproportionately benefited the wealthiest:

The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 [$510,000] as a result of the Bank of England's attempts to use electronic money creation to lift the economy out of its deepest post-war slump. ...
The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

It's not hard to see why this happens. One way the bank's quantitative easing program works, in theory, by pushing up asset prices in order to support the broader economy. And, according to the Bank of England, the median British household only holds about $2,370 in financial assets. So the direct benefits largely accrue to wealthier households.

What about the United States? Much like in Britain, the distribution of financial assets are also heavily skewed. As you can see on page 26 of this Fed report (pdf), the median American family in the middle income bracket has about $19,900 in financial wealth. By contrast, the median family in the top income bracket has $423,800 in financial wealth. So any move by the Fed to push up asset prices is likely to increase wealth inequality in the short term.

There are other effects, too. As The Wall Street Journal has reported, the Fed's efforts to bring down interest rates have mainly helped better-off Americans with good credit scores. For instance, it's exceedingly cheap to get a mortgage right now — for a small number of people. (The folks at Zero Hedge, who are no fan of Bernanke's stimulus efforts, have compiled a much longer list of links on how the Fed's quantitative easing program benefits the wealthy.)

But others point out that there's a flip side here. If a central bank's easing efforts bolster the broader economy, then the trade-off might be worth it. "The fact that the rich have benefited most from QE does not mean that others haven't benefited," writes economist Chris Dillow. "People without financial assets have gained, to the (small) extent that QE has increased job security and raised inflation, thus eroding the value of debt."

Indeed, a recent NBER paper (pdf) argues that overly tight monetary policy that keeps unemployment high is far more likely to exacerbate inequality than anything else. On this view, improving the job market is the best thing the Fed can do on inequality, regardless of the near-term effects.

Dillow also argues that tackling inequality should be left to legislatures, rather than central banks. "[I]f you don't like that distributional impact," he notes, "the solution is to mitigate it through the tax and benefit system." To that end, it's worth noting that more fiscal stimulus from Congress could be a way of boosting the economy without pumping up the assets of the wealthiest. Indeed, at certain points Ben Bernanke has pleaded with Congress to do more to support the economy. But Congress isn't doing much, which is why there's so much attention these days on QE3.