The Fed Is Actually Fixing Inequality, Unfortunately

Last Thursday, Elizabeth Warren expressed skepticism about the Fed tightening monetary policy, saying it would make people poor. This is true. But I believe it will make rich people disproportionately poorer than poor people.

This debate has been happening for a while. It’s no secret that inequality has been widening rapidly in recent years. From 2008 to 2020, incomes for the bottom quintile rose 33.6%, while incomes for the top 5% rose 53.1%, according to Census Bureau data. The richest 1% of households increased their wealth by $4 trillion in 2020, capturing about 35% of the extra wealth created, while the bottom half got about 4% of wealth gains.

Many Fed members (Minneapolis Fed President Neel Kashkari in particular) have said inflation actually helps low-income people, rather than hurting them. This seems counterintuitive because fuel and food make up a higher percentage of their expenses. So it would seem inflation hurts them the most. Then inflation ripped higher, irreparably harming average Americans, which is the opposite of what Kashkari predicted.

But the thinking is that interest rate hikes also hurt poor people because the economy slows, firms lay off workers, and people lose their jobs. People have argued that tighter monetary policy kills people, by leaving them unemployed and without hope. The counterargument is that looser monetary policy kills many more people. Inflation has increased the price of the food, plunging millions of people in the developing world into famine, as the US exports its monetary policy to the rest of the world. I will never back down from my assertion that, on balance, inflation is a much greater threat to humanity than deflation.

Everyone Has Less

If you are concerned about inequality, the gap in incomes and wealth between the rich and the poor, then surely you would favor tighter monetary policy. Tighter policy pushes asset prices down. This disproportionately hurts the rich because the rich typically own assets, and poor people have some cash in a bank account, which suddenly earns more interest.