Monetary Policy and Inequality

In the aftermath of the financial crisis and the Great Recession, inequality has received a great deal of public attention.¹ Following the Federal Reserve’s response to the economic downturn, some of that attention turned to the relationship between monetary policy and inequality. The Federal Reserve took unprecedented steps in the form of facilities designed to guarantee liquidity and stability in financial markets, raising the question of the effects of these unconventional monetary policies on inequality.

Addressing inequality is not a direct object of the Fed’s monetary policy. Its objectives are, according to the Federal Reserve Act, maximum employment, stable prices, and moderate long-term interest rates. As reflected in these statutory objectives, monetary policy is commonly thought of at the macroeconomic level, responding to and affecting variables such as aggregate employment, inflation, and long-term interest rates. Nonetheless, in pursuing macroeconomic objectives, the tools used by the Fed have the potential to affect inequality. To the extent that household characteristics—like age, type of income, and portfolio composition—are correlated with income or wealth levels and interact with monetary policy changes, they create channels through which monetary policy may affect inequality.

I examine the link between conventional monetary policy and inequality by reviewing some of the theoretical channels that have been proposed and examining the empirical evidence on their importance. I argue that the more meaningful changes in inequality occur over longer periods of time than the horizon at which monetary policy operates and are most likely the result of structural changes like demographic and technological changes. While monetary policy may have some redistributive consequences, their magnitude seems to be small. Finally, I also examine the claim that unconventional monetary policies have led to increases in inequality. Here, I argue that the evidence is still inconclusive.

Trends in Inequality

I will take inequality to mean the uneven dispersion of wealth or incomes across the whole distribution of households in the United States. I do not address how those outcomes vary by personal characteristics, like race, education, or gender.²

Income inequality has been rising in the United States since the late 1970s. Figure 1 shows income ratios between households at different points in the income distribution as measured by the Census Bureau’s Current Population Survey (CPS). Around 1975, households that were richer than 95 percent of US households had an income that was roughly 10.5 times higher than those that were richer than only 10 percent of all households. By 2013 this number had gone up to 16. The figure also shows that most of the increase in inequality was driven by the top part of the distribution, as the gap between the median household and the 10 percent richest households stayed more or less constant through the whole period.

Continues at the Cleveland Fed