The FOMC earlier this week sent monetary-policy analysts into yet another swoon as the words “relatively soon” were spoken on balance-sheet timing. Some think “relatively soon” is really soon, maybe even as soon as September. Some think relatively soon is not really all that soon, but probably pretty soon – year-end? Others think “relatively soon” is sometime before the next millennium if the Fed gets the right vibes. I think “relatively soon” is still way too late whenever it is. As a FedFin paper to be released on Monday makes clear, the Fed’s portfolio has a demonstrable, adverse impact on equality that is particularly acute for the most important source of wealth for all but the richest Americans: a home. With U.S. economic equality the worst in the developed world, we can ill afford allowing the Fed the luxury of conducting monetary policy to suit itself, not those among us who need the most help.
The Fed’s rationale is of course that its unprecedented accommodative ways have spurred full employment. I will not revisit here my views about how un-full employment is for many outside of the Fed’s data – Gov. Lael Brainard has discussed this well, with a more telling expression of how under-employed many people are to be found in the 2016 election returns. And, employment doesn’t tell the full tale of economic equality. As the IMF observed this week:
For some time now there has been a general sense that household incomes are stagnating for a large share of the population, job opportunities are deteriorating, prospects for upward mobility are waning, and economic gains are increasingly accruing to those that are already wealthy. This sense is generally borne out by economic data and when comparing the U.S. with other advanced economies.
Does the GDP data today validate the Fed? Another point from the IMF:
Post-crisis gains in real per capita GDP have accrued almost exclusively to higher income groups. Perhaps more disconcerting, “hollowing out” has meant a shrinking share of the population is taking home earnings that are close to this stagnant median income.
So, $4.5 trillion is of little value when it comes to making matters better for those who most need macroeconomic growth. How does the Fed’s big book squash housing equality?
Our paper lays this out in detail, using an array of recent data to show how the Fed’s portfolio – in general but especially with regard to all its agency MBS – has a huge role in housing equality. This is in part because the portfolio has made the financial assets (stocks and bonds) that enrich the wealthier among us so much more valuable even as house-prices have stalled or dropped for low-and-moderate households. In early July, FRB Gov. Powell pronounced the U.S. housing market recovered in the wake of the crisis, citing the 35 percent uptick in house prices. We show that this uptick is solely for the wealthiest among us who least rely on home equity valuation as a source of wealth. Just as inflation-adjusted living standards have sunk since the crisis, so too have inflation-adjusted house prices for all but the most expensive houses in the hottest coastal areas. These drive nationwide data, but not the day-to-day experience of the one-third of American homeowners whose houses still aren’t worth what they were before the crisis.
Is the Fed’s portfolio solely to blame for housing inequality? Of course not – as our paper shows, there are demographic, macroeconomic, scarcity, and – importantly – regulatory factors that also make it too hard for too many of us to afford the shelter we want that turns into the asset on which we rely for long-term economic security. That said, though, the Fed’s portfolio is a driving impetus to inequality – an additional impetus we can ill afford.