How Inequality Stymies Monetary Policy and What to Do About It

By Karen Petrou

  • In a dangerous double-whammy, monetary policy not only makes America even less economically equal, but economic inequality also frustrates monetary-policy transmission.
  • Thus, recessions are deeper and longer, reversing the good-times income gains central banks take as proof that their policies are not dis-equalizing even as the wealth divide grows ever wider.
  • Because monetary policy when rightly judged in terms of both income and wealth adversely affects economic equality and inequality stymies monetary policy, we won’t have macroeconomic-effective monetary policy until we have equality-focused monetary policy.
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The Dollars That Make a Difference: Results of the New Survey of Consumer Finances

By Matthew Shaw and Karen Petrou

Every three years, the Federal Reserve releases a unique, illuminating data set, the Survey of Consumer Finances (SCF).  The most recent report covering 2016 to 2019 comes at a time of acute political risk for the U.S. central bank due to growing demands for a third, “racial-equity” mandate and heightened recognition of the inequality impact of post-crisis monetary policy.  Perhaps for this reason, the Fed’s qualitative release and much subsequent media coverage highlighted what the Fed described as meaningful reductions in both wealth and income inequality.  Would it were so – percentages sometimes work in the Fed’s favor, but real dollars in people’s pockets, or the acute lack thereof, don’t.

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Ultra-Low Rates and Extra-High Inequality

By Karen Petrou

On March 12, the Financial Times ran one of Martin Wolf’s insightful columns, this one focusing on a critical facet of post-crisis monetary policy – ultra-low interest rates – to see why so much monetary-policy firepower had had such minimal macroeconomic impact.  Mr. Wolf suspects that the secular stagnation first framed by Lawrence Summers means that ultra-low real rates are here to stay due in part to economic inequality.  However, what if ultra-low rates on their own exacerbate inequality and thus create a negative feedback loop with dangerous implications not only for long-term growth and financial stability, but also for inequality?  Considerable evidence shows that ultra-low rates are inextricably intertwined with extra-high inequality.  Fed thinking on the new neutral rate thus must prick the traditional neo-Keynesian bubble to ensure that Chairman Powell’s new normalization isn’t a path to still worse inequality. Continue reading “Ultra-Low Rates and Extra-High Inequality”

Economic Inequality, Financial Crises, and 2019

By Karen Petrou

As 2018 drew to a close, the Federal Reserve Board and the Financial Stability Oversight Council each pronounced financial-stability risk to be comfortingly “moderate,” much as Ben Bernanke and Hank Paulson did in August of 2008.  It remains to be seen if market turmoil just days after is more than a bad blip, but there’s a still more worrisome financial-crisis risk lurking beneath volatile financial markets:  U.S. economic inequality.  Here, we show how current, acute inequality makes 2019 particularly perilous even if markets stabilize, President Trump eschews Twitter, the federal government begins anew, and all seems somehow otherwise right with the world. Continue reading “Economic Inequality, Financial Crises, and 2019”

The Inequality Under-Belly of “Sound” Consumer Finance

By Federal Financial Analytics

In remarks on Tuesday, Karen Petrou will lay out two reasons why post-crisis financial regulation makes America less equal: rules are is aligned with real-world business incentives and capital standards unduly penalize equality-critical lending.  Basing her views on Federal Reserve research, Petrou focuses on the Durbin Amendment, qualified-mortgage standards, small-dollar/short-term lending, and subprime mortgages.  Continue reading “The Inequality Under-Belly of “Sound” Consumer Finance”