First we had QE – unprecedented quantitative easing – and then there was what now seems like a faint-hearted stab at quantitative tightening (QT). With QT now on the outs and QE on hold, U.S. monetary policy can best be characterized as QQ – a quantitative question about whether the Fed’s portfolio is just another way to place the infamous “Greenspan put” to protect equity markets. As we’ve shown in several posts on our Economic Equality blog, all the Fed’s huge book has done since 2010 has been to boost equity prices, not secure the “robust” recovery the Fed touted until it turned tail earlier this week. Market analysts described the Fed’s reversal as “momentous” and “mysterious,” I call it dispiriting – with a still-huge Fed portfolio, the U.S. will get still less equal.
Earlier this week, a former and very senior Fed official spoke off the record about the central bank’s monetary-policy predicament. Clearly, no one has a clue about how large a portfolio the Fed should have, for what it should be used, or even what assets might be housed in it. At the meeting, there was much talk of excess reserves, the LCR, and broad market trends, but no recognition that the portfolio has reallocated economic return to favor the wealthiest households with the largest amount of financial assets.
Each time the Fed demurs on policy normalization, equity prices skyrocket. Each time markets go up, the U.S. wealth divide grows still deeper. As I noted last week, the top-ten percent of U.S. households got almost 25 percent richer in just the six years from 2010 to 2016. The top-ten percent also had a tidy head start after the crisis – $1.3 million in 2010 median net worth versus $6,800 for the bottom twenty percent. And, by 2016, what little wealth the bottom twenty percent had was still less – it lost 4.4 percent of wealth versus the big gains racked up at the top. Billionaires did even better, getting 262% richer from 2009 to 2017.
The Fed knows it has a problem – see its plans for a year-long review of how monetary policy works, or doesn’t. Despite her brave face defending Fed policy against inequality accusations, Janet Yellen nonetheless conceded that she couldn’t tell if post-crisis monetary policy actually worked because the recovery has indeed been so slow. In his 2018 defense of post-crisis policy, the former President of the Federal Reserve Bank of New York, William Dudley, gave up on the output and employment defense. Instead, he argued that large-scale asset purchases make it easier for the Fed to tell the market of its plans (i.e., to send “forward signals”). That is, whatever the inequality impact, Fed policy is working for the Fed in terms of signaling the market about its own next steps. This makes markets happy. Everyone else, not so much.
No wonder analysts are baffled about future Fed policy – the Fed is just making it up as it goes along. No wonder too that the American public is increasingly skeptical of the central bank and Congress is even more worried. And, finally, no wonder that a wealth tax is catching fire on the left along with ideas for a guaranteed national income and other great equalizers. Protecting capitalists, the Fed has lost sight of growing threats to capitalism.