In July, Rep. Ritchie Torres (D-N.Y.) asked Fed Chair Jerome Powell about the inequality that I and many others attribute in part to post-2010 Fed policy. In November, Sen. Jon Ossoff (D-Ga.) asked virtually the same questions and got the same "not us" answer.
This response is surely comforting to the central bank, but it should be unacceptable to the Senate as it considers Powell's confirmation. It will be easy for senators to spend all their time quizzing Powell on why inflation isn't actually "transitory," why employment isn't "maximum," and if markets pumped so high atop the Fed's safety net will do yet another black-swan dive. However, the cost of economic inequality measured by political polarization, lost hope and even lost lives is far too high to ignore. To the extent that the Fed has increased inequality — and it has — it should quickly change policy or be required to do so.
There are four central questions Congress should ask Powell during confirmation hearings:
Question One: The Fed's mandate already includes a statutory duty to reduce economic inequality, but the Fed doesn't seem to read it that way. Must we clarify it? Congress has already demanded that the Fed do what it can to address economic inequality. The first line of questioning thus should call the Fed on the carpet for its stock answer to any question about economic inequality: We wish we could do something about it, but our "dual mandate" is limited to only maximum employment and price stability. On each of these counts, the Fed falls short from an equality perspective because employment even now isn't maximum and price stability — such as it was — is a thing of the past. Indeed, the Fed by law has a triple mandate also demanding "moderate long-term interest rates." These are essential to wealth equality because low rates not only increase financial instability but also eviscerate the ability of lower-income families to save for the future. With savings rates now at 0.06% and inflation running at 6.8%, anyone who follows traditional advice and saves for the future is out 6.72%, evaporating their ability to save for a down payment, unexpected expenses, or a safe retirement. Low rates also don't reduce the cost of homeownership for low-and-moderate income households, especially if they're Black or Hispanic. Under the law, the Fed also has a still higher mandate: to secure the "general welfare." As a result, the usual "dual-mandate equality” excuse is unacceptable not only because the Fed's direct mandate demands more, but also because Congress has ordered the Fed to take account of the public good. It did so in 1946 and again in 1977, not to reduce central-bank independence, but to ensure that monetary policy advances public welfare for all segments of the population, not just those who prosper via the financial market.
Question Two: The Fed is now a powerful shadow fiscal powerhouse. What steps will you take to return to an equality-focused monetary policy and reduce your anti-equality fiscal footprint? The Fed's second go-to when pressed on issues of economic inequality is to say it wishes it could do more, but the mandate keeps it plenty busy so only fiscal policy can tackle economic inequality. This might make sense if the Fed were on some ascetic monetary-policy mountaintop, but it isn't. The Fed is fiscal and then some by virtue of its portfolio — about one-third of GDP — the extent to which it allocates credit, the ultra-low rates that monetize federal debt, and the market backstops that redirect capital from pro-employment plants and equipment to pro-inequality financial speculation. Because the Fed's fiscal footprint is designed to power up the "wealth effect," not shared prosperity, it flies in the face of congressional efforts to boost bottom-up growth.
Question Three: Why do you still think low rates spur lower-wage employment when the last decade shows they don't? In answer to Rep. Torres, Powell not only rested his case on a limited mandate but also longstanding assertions that ultra-accommodative policy advances employment for low-and-moderate income households. This is conventional, model-driven Fed thinking, but it isn't validated by empirical data over the last decade when inequality accelerated in the face of all the Fed's nostrums. In fact, the Fed's interventions are contraindicated for economic equality. Before the pandemic hit, employment indeed had finally picked up. However, it continued to do so after the Fed in 2015 began a series of small, steady rate increases leading to hikes in both employment and the real measure of full employment — labor participation. This was true across all groups, but Black and Hispanic workers did the best. Now, with rates far below zero taking inflation into account, African-American employment has sharply lagged everyone else and employment remains well below these higher-rate, pre-pandemic trends. We are seeing wage growth, but it's not only inequitable but also about two percentage points below the rate of inflation, putting workers even farther behind.
Question Four: Is it not already past time for the Fed to accept the limits of its models and the failures of its forecasts, acknowledging that — if their policy had worked as the Fed represents — income and wealth inequality would not have skyrocketed since 2010? And with this recognition, will the Fed use its enormous clout for broad-based prosperity, not market-driven wealth accumulation at the top of the pyramid?
Karen Petrou is a managing partner at Federal Financial Analytics, Inc. She is the author of “Engine of Inequality: The Fed and the Future of Wealth in America.”