Critics who say the Federal Reserve’s easy money policies only benefit millionaires and billionaires are wrong, said Ethan Harris, head economist at Bank of America Merrill Lynch.
By keeping interest rates near
zero percent for the past six years, the central bank has helped to encourage job growth as the U.S. economy recovers from the deepest decline since the Great Depression, according to the bank. The
unemployment rate has fallen to about 5.5 percent after hitting a 30-year high of 9.9 percent during the recession.
“Critics of the Fed argue that by stimulating asset markets, easy Fed policy is benefiting the upper income families, but not helping people who do not own assets,” Harris said in
a June 9 report obtained by Newsmax Finance. “In reality, the biggest impact of easy Fed policy is to speed the drop in the share of the population that is unemployed and hence has zero labor income — the most pernicious instance of inequality.”
Income inequality has become a source of political debate with bestselling books such as Thomas Pinketty’s “Capital in the Twenty-First Century” arguing that higher taxes would help to redistribute wealth to people with less income. Part of the debate centers on the role of the Fed in pushing up prices to create a “wealth effect.”
Proponents of the wealth effect say people are more willing to borrow and spend money when they see the value of their homes and investments rise.
Detractors say the economic effect is limited while easy money policies create dangerous asset bubbles that eventually pop and trigger job-killing recessions.
Former Fed Chairman Ben S. Bernanke has defended the central bank's policies in several blog posts, including
one that said widening inequality is a very long-term trend.
"The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, including globalization, technological progress, demographic trends and institutional change in the labor market and elsewhere," Bernanke said. "By comparison to the influence of these long-term factors, the effects of monetary policy on inequality are almost certainly modest and transient."
BofA's Harris agreed with that assessment, saying, "Bernanke is being too generous to his critics."
“Easy policy does stimulate asset markets, favoring the rich, but this is more than offset by the stimulus to the labor market,” said Harris, who previously worked at the Federal Reserve Bank of New York for nine years. “There is no better way to reverse a cyclical deterioration in income distribution than to quickly restore full employment.”
He also said economic recoveries happen in two stages: the first helps households with assets that grow in value, the second helps people who find jobs. The Fed needs to support the economy until it reaches that later stage before thinking about a rate hike, he said.
“Unemployed people by definition have no labor income and rely purely on government help or investment income,” Harris said. “A premature policy tightening would have had a major negative impact on low-income families.”
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