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Was the Federal Reserve's massive bond-buying program an engine of economic inequality? It's easy to think so. The Fed bought more than $3 trillion of U.S. Treasury securities and mortgage bonds to prop up financial markets. The idea was that investors who sold to the Fed would reinvest their cash, raising stock and bond prices. Enriched investors would then spend more and revive the economy. With stock and bond ownership concentrated — 90 percent of stocks belong to 10 percent of households — the program looks like welfare for the wealthy.
It's possible. Byron Wien — a respected stock strategist at Blackstone, an investment company — recently concluded that the Fed's bond-buying explained nearly 25 percent of stocks' rise since their low in March 2009. That was worth about $3 trillion on a gain of $13 trillion, which represented a tripling of stocks in the Standard & Poor's 500 index. Most of the rest of the gain reflected higher profits.
All this sounds convincing, but the case isn't airtight. Indeed, the reality may be the opposite: The Fed may have helped the middle class and poor more than the upper class. That, at any rate, was the conclusion of a conference held by the Brookings Institution, a well-known Washington think tank. In one paper, economist Josh Bivens of the Economic Policy Institute, a left-leaning research and advocacy group, made three points in defense of the Fed.
First, the bond-buying strengthened the economic recovery by lowering interest rates and creating jobs in interest-sensitive sectors such as housing and manufacturing. "Stimulus that reduces unemployment disproportionately benefits low- and moderate-wage workers," Bivens wrote. Overall, Fed policies cut the unemployment rate by 1 percentage point, he estimated. That's about 1.5 million jobs today.
Second, back-of-the-envelope estimates exaggerate the Fed's effects on stock prices. Bivens reviewed studies and found estimates ranging from 3 percent to 8.5 percent — far smaller than Wien's recent estimate. Bivens settled on 5 percent as a plausible gain.
Third, lower interest rates also boosted the wealth of the middle class, with the largest effects on home prices. Bivens estimated that interest rates on mortgage bonds fell 1.5 percentage points, raising average home prices about 7 percent. That's significant, because for middle-income Americans, housing represents nearly two-thirds of their wealth.
Taken together, the Fed's policies had a progressive impact, Bivens contended. They promoted equality, not the reverse. Gains for the upper class have been overstated, gains for the middle class understated. In a post on hisblog, former Fed chairman Ben Bernanke — now at Brookings — echoed Bivens's conclusions.
No one doubts that the Fed's policies have distributional effects, but they are often more complex than rich vs. poor.
Speaking to the Brookings conference, economist Susan Lund of the McKinsey Global Institute argued that the Fed's low-interest-rate policies have favored younger households, who are net borrowers, and hurt older households, who are net savers. Households aged 35 to 44 experienced average annual gains of about $1,700, while households aged 65 to 74 had average losses of $1,900, according to McKinsey research.
Given the disagreement about the Fed's impact, this is an area that could use more research. Meanwhile, the mounting attention to inequality poses a question for the Fed: Should it try to achieve distributional goals in setting its policies?
At the conference, Donald Kohn, a former Fed vice chairman, argued against that. The Fed's goals now — by law — are to promote stable prices and maximum employment. The Fed should concentrate on these objectives, Kohn said, and leave distributional issues (who should pay taxes and receive government benefits) to elected officials.
Kohn is correct. It's not just that politicians should settle these obviously political issues. There's also a practical problem: The more goals the Fed is given — or assigns itself — the harder it will be to achieve all of them. There are bound to be contradictions. It's a formula for failure.
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