The Fed’s Heavy Hand on Economic Equality
By Karen Shaw Petrou

The US Federal Reserve insists it is exiting quantitative easing because the economy no longer needs the stimulus it provides. In reality, QE has benefited the haves at the expense of the have-nots and will be very hard to reverse, especially in light of post-crisis banking rules such as the liquidity coverage ratio (LCR), which make it challenging at best for the Fed to lower its asset portfolio to anything close to pre-crisis levels. As the Fed reverts to a more conventional monetary policy, it must address the negative side-effects of QE and enact rule changes that encourage banks to lend and take deposits, rather than simply hoarding safe assets to meet regulatory ratios. It is bad enough that a huge Fed balance sheet distorts asset pricing and allocation across the global economy, but from a social welfare and political stability perspective, it is still worse that QE has increased the already wide gap in US income and wealth equality. The Fed’s QE defence – voiced by chairs Ben Bernanke, Janet Yellen and Jerome Powell in turn – is that post-crisis monetary policy was equalising because it prevented a Great Depression, and the Great Recession is transitioning to “full” employment, thus reversing the short-term income inequality effects. Employment, though, is full only if you think that multiple wage-earners in a single family, each working multiple jobs, makes for prosperity despite the lack of meaningful wage growth in recent decades. GDP is similarly robust if you average productivity gains across the population as a whole. Account for distributional effects and all too many Americans are stuck in seemingly endless recession. Aggregate totals tell us nothing about economic equality, which is clearly profound judged by any number of studies, calculations and analyses.