The Fed turns its fight against inflation into a fight against inequality
As the Federal Reserve steps up its efforts to rein in high inflation, its top officials are presenting their dynamism in a new light: as a jab at economic inequality.
This reflection marks a clear departure from the conventional view of the Fed’s use of interest rates. Normally, the big rate hikes the Fed plans for the coming months would be seen as a particular threat to poor, low-income households. These groups are most likely to suffer if rate hikes weaken an economy, drive up unemployment and sometimes trigger a recession.
Instead, some of the more dovish Fed officials, who typically favor low rates to support the labor market, are now doing all they can to point out the ways inflation is hitting the hardest Americans the hardest. poor. Curbing high inflation, they argue, is a matter of fairness.
The burden of high prices “is particularly heavy for households with more limited resources,” Lael Brainard, an influential member of the Fed’s Board of Governors and longtime interest rate dove, said in a speech Tuesday. “That is why bringing down inflation is our most important task.
Brainard noted that food and energy together account for a quarter of the price spikes that pushed inflation to 40-year highs. The poorest Americans spend about a quarter of their income on groceries and transportation, she said, while the wealthiest households spend less than a tenth.
Members of Congress from both parties generally agree that the Fed needs to fight soaring inflation by steadily raising rates, which will make many personal and business loans more expensive. Indeed, most economists said the Fed waited too long to do so and now runs the risk of having to tighten credit too quickly and derail the economy. Last month, the Fed raised its key rate from near zero to a range of 0.25% to 0.5%.
Still, some Democrats have expressed concern that higher rates will dramatically slow hiring, even if unemployment for black workers, for example, remains higher than for whites.
“We clearly have a long way to go when it comes to making sure everyone has a good quality job,” Sen. Sherrod Brown, a Democrat from Ohio, said last month at a a hearing on the nomination of Jerome Powell for a second four-year term as Fed Chair. “Rising interest rates too soon can dampen job growth.”
Tim Duy, chief U.S. economist at SGH Macro Advisers and other analysts say the Fed is right to point out the damage inflation can do to Americans’ ability to meet basic needs such as food, medicine, and food. fuel and rent. But they also suggest that some recent comments from the Fed have exaggerated the idea that inflation worsens economic inequality.
Nathan Sheets, chief global economist for Citi and former Fed economist, notes, for example, that inflation reduces debt burdens, which can disproportionately benefit lower-income Americans. Wages generally increase to keep up with inflation. But mortgages and other debts usually carry fixed interest rates, which makes them easier to pay off.
Brainard’s speech this week was one of the starkest examples of the Fed’s argument that inflation can exacerbate inequality. Brainard, who was nominated for the role of No. 2 at the Fed and is part of Powell’s inner circle, said low-income households – defined as the fifth poorest – spend 77% of their income on necessities, including food and housing. In contrast, the richest fifth devotes only 31% of its income to these categories.
Similarly, Mary Daly, chair of the Federal Reserve Bank of San Francisco and a long dovish voice on the Fed’s policy-making committee, surprised Fed watchers this week when she said “the inflation is as bad as not having a job”.
“I understand…if you have a job (but) you can’t pay your bills, or I feel like I can’t save up for what I need to do, then that keeps you up at night” , Daly said. in remarks to the Native American Financial Officers Association.
Brainard, in his speech, noted that poorer people often pay higher prices for the same item. High-income households, for example, can afford to buy in bulk or stockpile an item when it is sold at a discount, thereby reducing their cost per item.
And when inflation rises, Brainard said, households buying branded cereals may switch to less expensive store brands. But poorer consumers who already buy cheaper items cannot make an equivalent price change.
Powell himself began shifting his rhetoric in that direction last winter during congressional testimony, Duy said, when the Fed chairman mentioned the harsh impact inflation is inflicting on disadvantaged Americans. Powell had not raised this concern in previous testimony in September.
It was a notable shift for Fed Powell, which has focused more on labor market inequality than its predecessors. In August 2020, the Fed updated its policy framework to clarify that its maximum employment target was “broad and inclusive”.
This meant that the Fed would consider unemployment rates for black and Hispanic workers, rather than just the numbers, when setting its interest rate policies. The central bank also said it would no longer raise rates in anticipation of higher inflation, but would wait for the rise in prices to actually materialize.
Brainard had pointed to a reason for taking a more patient approach in a speech in February 2021. In those remarks, she said raising rates to anticipate inflation “could stunt the progress of racial and ethnic groups who have been facing systemic challenges”.
Powell and other Fed officials say their goal now is to reduce inflation by slowing, but not stopping, growth. Reducing high inflation is important to keep the economy growing, they say, and ultimately to keep unemployment low.
For now, Sheets suggested, the Fed can raise rates without worrying too much about hurting the labor market because its benchmark rate is so low. Fed officials don’t think their key rate will start to dampen growth until it hits around 2.4%.
Minutes from the Fed’s last meeting in March, released Wednesday, showed officials want to get to that level ‘quickly’, and economists expect them to do so by the end of this month. year. At this point, if inflation is still too high, the Fed may have to raise rates further, to the point that layoffs occur and the risks of a recession increase.
“That’s when it will get sticky and difficult for the Fed — when those short-term trade-offs come up,” Sheets said.