The Federal Reserve is taking actions that might hurt the poor. Not because Fed officials want to hurt the poor, but because virtually any choice they make will likely hurt the most vulnerable in some dimension.
After all, recessions tend to disproportionately hurt lower-income or otherwise disadvantaged workers. Those with lower wages, less education or disabilities are often the first to see their hours and jobs slashed, and the last to be hired back. This was especially true in the 2020 pandemic recession and subsequent recovery. It is reasonable, then, to worry about Fed actions today.
Here’s the thing. As central bank officials have pointed out, high inflation also disproportionately hurts the poor.
As a general rule of thumb, most bad things happening in the macroeconomy usually cause greater suffering among the poor. On some level, this should be obvious: If you have more resources — a savings cushion, in-demand professional skills, a strong network — you are more likely to be able to withstand a big economic shock.
It’s not always true, of course, but it happens to be the case now as we stare down the twin threats of recession and inflation.
Almost everyone hates big increases in prices. But lower-income Americans, as well as people of color, have arguably been hurt most by skyrocketing inflation. There are a few reasons for this. For one, low-income households tend to spend a larger share of their budgets on necessities, such as groceries and rent. These necessities have already gotten much more expensive and are harder for consumers to cut back on (unlike, say, spending on entertainment or other luxuries that wealthier households disproportionately purchase).
Lower-income households also tend to spend more than they earn, largely because of transfer payments such as the earned-income tax credit that supplement their wages. That means even if they’re getting relatively large nominal wage increases (as is the case lately), their additional wages can still be outstripped by higher expenses.
Additionally, as Fed Vice Chair Lael Brainard pointed out during a recent speech, the rich also have greater ability to substitute down to cheaper products. For example, if breakfast cereal prices rise, higher-income households that buy name-brand Cheerios can save money by opting for the cheaper store brand. But poorer households were likely already buying that cheap store-brand option.
The upshot is that no matter what path the Fed chooses, it is likely to inflict pain on the poor. If there is a recession, the poor suffer. If inflation continues unabated, the poor suffer, too.
In fact, the outcome the Fed fears most is inflation becoming more entrenched — that is, Americans start to expect more inflation and preemptively raise prices or demand higher wages in anticipation of everyone else doing it. Inflation would then become a self-fulfilling prophecy and much harder to stamp out. In that dreaded scenario, not only would living standards continue to erode while prices rise, but the Fed would have to slam on the brakes harder, plunging us into a worse recession.
That would result in more painful job losses and worse long-term economic scarring — again, disproportionately hurting those least able to absorb the pain. (This is basically what happened in the early 1980s.)
Despite frequent insinuations that central bankers only care about the rich, today’s Fed leadership has been unusually explicit in its concern for lower- and middle-income households. Fed Chair Jerome H. Powell has spoken publicly about the institution’s commitment to achieving “more inclusive prosperity” and how homeless encampments near his office have affected his perspective on whom the Fed is supposed to serve.
So what’s the Fed supposed to do to help the poor, or at least hurt them less? Fed officials are hoping to achieve a “soft landing” — that is, raise rates just enough to cool demand a little, without causing a recession and its associated job losses. That outcome is possible, but looking increasingly difficult to achieve. So the Fed has to pick its poison: erring on the side of tolerating more inflation (slower rate hikes), or bigger risk of recession (faster rate hikes).
There are things the White House and Congress could do to modestly reduce price growth and take some pressure off the Fed — tariff repeal, immigration fixes, suspending some shipping restrictions. But so far, politicians have shown little will to do any of them.
It is politically easier to leave all the hard choices to central bankers — and then blame them for whatever suffering ensues.