Chinese state intervention widened inequality for decades. Could Fed actions pose similar risks?

Amid the national crisis on race, this debate on the distributional consequences of monetary policies is certainly an important one.

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Federal Reserve Board Chairman Jerome Powell. | Alex Wong/Getty Images

INEQUALITY IS A UNIVERSAL PROBLEM

To start, it’s important to recognize that what Jay Powell said is partly true. Economic inequality in the United States has risen dramatically since the late 1970s, a result of wage stagnation and rise in corporate profit share that effectively redistributed income from low- to high-savings households. Over time, the income gap between the rich and poor becomes a self-perpetuating cycle, creating other problems like an education gap or wealth gap that monetary policies do not have control over.

THE DANGER OF NARROW POLICY GOALS

Speaking on racial gaps in monetary policies, Atlanta Fed President admitted that economic models often don’t have “reachback” loops for things that happened in the past to guide the optimal strategy for today. Assessing the impact of our policy decisions on inequality is only done retroactively — but this can lead to severe consequences down the road.

OPTIMAL MONETARY POLICY FOR THE MASSES

So how can the Fed fight inequality? According to current New York Fed President William Dudley, the Fed’s tools are “just not suited to address the inequality problem.” As he sees it, the Fed have two choices: not have a recovery and have less inequality or have a recovery with inflated financial asset prices and more inequality.

CONCLUSION

In the long-run, inequality can’t be solved by monetary policies alone; it must be accompanied by other reforms in our education system, our union laws, and our Congress. Still, an important first step is to recognize that our policies must focus not only on the overall health of the economy, but the economic well-being of different communities — particularly the most vulnerable — as well.

Writing on economic, equality, and foreign policy. Tweet me @VyNngn

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