“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity,” Yellen said in prepared remarks.
The problem of inequality is an unusual topic for the leader of the Fed, if only because the central bank’s ability to address the issue is limited. Yellen listed four factors that can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.
All of these issues are decidedly outside of the Fed’s purview. In fact, the Fed has been frequently criticized for exacerbating the country’s yawning disparity in wealth as its easy-money policies helped Wall Street rebound quickly from the financial crisis.
Yellen did not address in her prepared text whether the Fed has contributed to inequality. Nor did she weigh in on whether it may actually be slowing down economic growth, an idea that is gaining traction among economists but which remains controversial. A recent analysis by Standard & Poor’s called extreme inequality a “long-term drag,” and the ratings agency lowered its forecast for U.S. economic expansion over the next decade from a growth rate of 2.8 percent to 2.5 percent. International Monetary Fund Managing Director Christine Lagarde said this spring that the global inequality has resulted in a “wasteland of discarded potential.”
The Fed, however, has seemed more conflicted. This summer, former Fed governor Kevin Warsh called the central bank’s actions a form of “reverse Robin Hood” during an interview on CNBC. Meanwhile, St. Louis Fed President James Bullard said in a June speech that while efforts to pump money into the economy have boosted Wall Street, he would “stop short” of saying that has made inequality worse. Former Fed Chairman Ben S. Bernanke and Yellen have pointed to the central bank’s support for the housing market as evidence that its stimulus is finding its way to Main Street.
But even there, the central bank’s efforts may be falling short. In her speech Friday, Yellen pointed to Fed data showing that the bottom half of homeowners by wealth lost 61 percent of the equity in their homes between 2007 and 2013. The top 5 percent lost 20 percent. However, Yellen also noted that the ongoing recovery in the housing market this year has helped boost wealth for average and low-net worth households by nearly a third.
Friday’s speech was not the first time that Yellen has tried to tackle the issue of inequality. During testimony on Capitol Hill in February, she called the problem “one of the most disturbing trends facing the nation.” And in 2006 -- at the height of the boom -- she sounded the alarm over the depth of the country’s economic gains.
“Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people,” she said in a speech at the time.