Please Mr. Federal Reserve, stop worrying about income inequality!

Posted on March 26, 2013 by

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CNBC reports today that the Federal Reserve is increasingly considering income inequality as a consideration for monetary policy.  The basic idea seems to be that monetary policy ought to be kept easy as long as those in the lower income groups are unable to gain jobs.  As CNBC reports

Some on the FOMC, they said, assert that inequality “undermines the ability of the economy to grow sustainably and efficiently” and could lower the long-term growth rate.

This is suspect for several reasons.  First, where is the data to show income inequality as the causal factor for lower economic growth?  Second, and most important, I would assert the Fed is a contributor to income inequality by their easy money policies.  The Fed’s policy of financial repression hurts lower income savers directly, and creates disincentives for anybody to save.  The poor especially need help to be able to defer consumption in favor of savings that will better their condition later.  The easy money policies that lead to boom-bust hurt the poor the most, since when they lose jobs they have little financial reserve to fall back on.  And finally, the easy money policies disproportionately help the Wall Street firms and banks with troubled assets; lower interest rates drive prices of all assets higher.  One of the main purposes (unstated of course) of the current financial repression is to enable the banking system to recapitalize, and the source of the funding is the average American who has money in the bank.  Financial repression is alive and well, and we’ll see it camouflaged as concern for the poor and income inequality.  Just stop, Mr. Fed.  Please.  Stop.

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