Although some cheered Tuesday’s Census Bureau report seeming to show “growing” median U.S. incomes, the report in fact presents a bleak picture of U.S. economic equality.  Although median income grew, this was largely due to the growth in the number of multi-income households, a number that does a lot for those at the Fed who think U.S. employment is “full,” if not so much for the parents now scurrying to figure out who takes care of the kids.  Most worrisome of all is the fact that U.S. income inequality has reached an all-time record across the U.S. population, with income disparities still more grievous when race or ethnicity is taken into account.  The Fed may have made U.S. banking a bulwark and GDP is a bit better, but economic inequality has not only continued its grim march, but also grown sharply worse since the Fed implemented post-crisis monetary and regulatory policy.  As a new issue brief will make clear on Monday, one cause of the correlation between Fed policy and economic inequality is the Fed’s huge portfolio.  The FOMC should shrink it far faster than now planned to lift the Fed’s heavy hand from the equality scale.

This new paper continues our economic-equality focus, deploying new data and recent research to build on earlier equality examinations.  In July, we looked at how both monetary and regulatory policy make sustainable mortgages hard to get and U.S. housing thus still less equal.  The Fed’s $4.5 trillion balance sheet plays an important role here because, as the new paper also demonstrates, U.S. wealth comes from different sources depending on how wealthy you are.  Because the Fed holds so many assets and has kept interest rates so low, yield-chasing has sharply boosted the valuation of stocks, bonds, and the other financial assets that constitute the major source of wealth for upper-bracket households.  Down the totem pole, wealth comes – if it comes at all – from home ownership and, as the mortgage paper shows, lower-price housing has been hit very, very hard by both the crisis’s after-effects and the shift in U.S. wealth distribution. 

In the wake of this paper and some of our other economic-equality work, I’ve been told that looking at asset valuations misses the real benefit of post-crisis Fed policy.  This comes, critics say, largely from employment gains since the crisis.  In our forthcoming paper, we look hard at this argument to see if any post-crisis employment gains one might credit to the central bank indeed offset the adverse distributional impact of quantitative easing.  It short, they don’t.

First, employment is only “full” if you’re feeling fulsome about the Fed.  Second, wealth accumulation is a cumulative game, as Thomas Piketty’s masterful tome, Capital in the Twenty-First Century, makes clear.  Even if income were picking up – which it isn’t in equality terms – it would take decades to reverse the cumulative gains the wealthiest have garnered since the crisis and reverse everyone else’s loss.

The Federal Reserve Board and System are deeply concerned about economic inequality – much of the research we cite in our new issue brief is in fact from the Fed.  But, regardless of this and much other recent research, the Fed’s official position is that: 1) economic inequality is really, really bad; and 2) it’s everyone else’s fault. 

Chair Yellen likes to blame ineffective U.S. fiscal policy – and who wouldn’t.  Economic inequality is also due to embedded demographic, technological, and other trends over which the Fed has limited, if any, authority.  But, because economic inequality is indeed really, really bad, the Fed should do really fast what it really can to fix it.

Stepping back from QE and reducing the huge book of Treasury and agency obligations won’t be easy.  But this is a problem of the Fed’s making and it’s thus incumbent on it to solve it as quickly as possible rather than continuing just to study thorny questions of neutral interest rates and optimal unconventional monetary policy.  The FOMC should stop its duck-and-cover and lay out far more clearly and definitively what it plans to do when, shrinking the portfolio through some asset sales rather than waiting for nature to take its course through run-off.  The FOMC can and should leave itself an emergency “out” from a plan, but a plan it should make and this plan should be ambitious and fast.