When it comes to inflation, the Fed must take inequalities into account
The writer is the author of ‘Driving Inequality: The Fed and America’s Future of Wealth‘
Like most central banks, the US Federal Reserve has been forced to question why more than a decade of ultra-accommodative monetary policy has had such lackluster economic performance. The answer is, bad data leads to bad policy.
The Fed data is misleading because it assumes the United States is the middle class nation it has ceased to be. Until it uses data that reflects the nation as it is, the Fed won’t bring America back to shared prosperity any more than someone using a New Amsterdam map will find the Central Pond. Park.
Its inflation measures have three major flaws. First, they omit costs such as food, energy and shelter. Doing it is more orderly, but fails to capture what households really need and therefore what they are likely to do when monetary policy changes.
The second problem is that the Fed’s data is raw – even though its favorite cost of living indices accurately measure the cost of a basic basket of goods and services, they don’t tell us if families have the power. purchase without debt to afford it. . Apparently, low inflation in a gross index can easily translate into painful or risky leverage for households, each having an unfavorable macroeconomic impact.
Finally, indices do not measure discretionary spending or financial resilience in ways that predict how price increases actually affect consumption – for whom and in what way. Wealthy households can adjust their sails and stay on course financially; the rest of the nation must draw on or do without scarce reserves.
Much of current monetary policy relies on what economists call marginal propensity to consume – the demand engine that fuels demand which in turn promotes jobs and growth or, if unduly overheated, triggers demand. inflation. The Fed still assumes that interest rates guide decisions about the use of discretionary income. But the inequality of income and wealth is such that only high-income households now have this marginal propensity, and most of them already have more than enough of it, so their propensity is low even though their margin is large.
In contrast, low-, middle- and middle-income families consume even though their ability to respond to interest rates is negligible. These households have little ability to increase or decrease their consumption in response to changing rates as most of them live paycheck to paycheck. By a recent estimate, 64 percent of US households are either financially vulnerable or just coping.
Year on year, the real cost of living in the United States has skyrocketed – homes are on the rise more than 12 percent, a used car is up 21%, and food prices have increased by more than 2%. The Fed has recognized a few of these cost increases, but attributes them to “transient” factors that are not contributing to the sustained inflation it wants to see before normalizing its policy. But it’s hard to see what structural factors will reverse far enough and fast enough to erase these cost barriers to families’ financial security.
In the absence of another deep recession, even a glut of semiconductors or lumber won’t result in deep discounts on any of these essentials, bringing them down to 2019 levels, let alone to levels. that a family whose wealth is below the median can afford without continuing to go into debt.
The US central bank has played a direct, albeit totally unintended, role in increasing income and wealth inequalities to astonishing levels. He did so not only by misinterpreting the data, but also by ignoring his mandate.
The law governing the Fed requires it is to seek full employment as measured by those who want to work, to achieve price stability based on purchasing power and to set “moderate” interest rates.
This is a triple mandate, not the “double” that the Fed frequently quotes, and demands more from the Fed than its preferred version: “maximum” employment and “price stability” measured by the bank’s own gauge. central.
Inflation is already a painful tax for low, middle and middle income households. Released at the end of May, latest official US issue showed an annual inflation rate of 3.6 percent based on April prices.
If the Fed allows this tax to rise, it will let the economy soar at a time when ultra-low rates, the Fed’s huge portfolio of assets, and federal government spending inject trillions. in the economy with no sign of a sustained recovery for those who need it most.
This won’t end well unless the Fed recognizes the profound impact of inequality on the US economy and quickly readjusts its policy to address it.