The Washington PostDemocracy Dies in Darkness

Now we know what the Federal Reserve did to inequality

(Matthew Cavanaugh/European Pressphoto Agency)

One of the most common criticisms of the Federal Reserve’s easy-money policies is that they primarily benefit the rich.

It’s easy to see why. The central bank steers the economy by setting a key interest rate that influences financial markets. Eight years of that rate at zero and $3 trillion in stimulus money have helped the major U.S. stock indexes notch new record highs month after month -- even as wages for most of the nation remain stagnant.

But three new papers from the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution challenge that popular assumption. The research, released Monday, finds little evidence that the Fed has widened the gap between the rich and the poor. If anything, the central bank has given the biggest boost to those in the middle.

That’s because the largest asset held by most families is their home. When the Fed targets higher inflation, debt becomes cheaper -- and mortgages become easier to pay down. Those with the biggest mortgages relative to their income tend to be middle-class, middle-aged households, making them the winners in an era of easy money, argue Matthias Doepke and Veronika Selezneva of Northwestern University and Martin Schneider of Stanford University.

Those gains come at the expense of wealthy retirees who tend to hold their money in cash and bonds, which are hurt by higher inflation. So inequality is reduced from both directions.

In fact, the central bank has purchased $1.7 trillion worth of mortgage-backed securities in the aftermath of the Great Recession with the express purpose of propping up the real estate market. Josh Bivens, research and policy director at the left-leaning Economic Policy Institute, found that program helped push up housing prices by 7 percent, while raising stock prices 5 percent -- essentially cancelling each other out.

More important, Bivens proposes, the Fed has sought to lower unemployment through its stimulus efforts. By pumping money into the economy, Bivens estimates, the central bank lowered unemployment by a percentage point, making it more powerful than the fiscal stimulus enacted in 2010. Stabilizing the economy and ensuring people have jobs help reduce inequality by ensuring the bottom doesn’t fall out, Bivens says.

“Recent concerns that the Fed’s expansionary stance since the onset of the Great Recession may have exacerbated long-running trends towards greater income inequality seem quite misplaced,” he wrote.

Of course, even if central bank policy has not widened inequality in the country, a yawning gap remains between the haves and the have-nots. The unemployment rate for workers without a high school diploma is about three times that of those with a college degree. An unusually large number of people are working part-time but want more hours or have given up looking for work altogether. And although home prices have risen steadily for nearly three years, they are still off their peak in 2006, according to the S&P Case-Shiller Indices.

One of the Hutchins Center's papers does show that Fed policy has exacerbated regional differences. Low interest rates have primarily helped homeowners who could refinance their mortgages. But those who were underwater -- that is, they owed more on their mortgage than their homes were worth -- could not take advantage of lower rates.

That means the Fed’s easy money had a tough time reaching places where home prices fell most dramatically, even though those were the regions that needed central bank stimulus the most.

The Fed’s experiment in pumping money into the economy “provided the least amount of monetary stimulus to the metro areas hit hardest by the recession,” wrote Martin Beraja, Erik Hurst and Joseph Vavra of the University of Chicago and Andreas Fuster of the New York Federal Reserve Bank.

Still, the research helps buttress the arguments top Fed officials themselves have made over the past eight years when defending their actions. They have not always been very convincing.

Fed Chair Janet Yellen was pressed on the problems of income inequality during her testimony before the House Financial Services Committee in February:

“What we can do is try to assure a generally strong labor market where it's possible for those who want to work to find jobs in a reasonable amount of time. We can't determine the wages associated with those jobs, or what sectors those jobs will appear in. But the policies that we follow and the general state of the economy have an important influence on the overall strength of the job market. And we're trying to achieve the job market where individuals who seek to work and want to work are able to find work.”

But Rep. Mick Mulvaney (R-S.C.) was skeptical.

"To the extent you claim to be wanting to help fix income inequality and wealth distribution in this nation, in the view of many of us, you're actually making it worse,” he said.