During this morning's hearing, quite a few members of the Senate Banking Committee asked Janet Yellen, the president’s nominee to run the Federal Reserve, whether the Fed was benefiting certain segments of society more than others. Unsurprisingly, Yellen’s response was similar to what current Fed Chairman Ben S. Bernanke said when he was asked the same sorts of questions in July: The Fed is trying to help all Americans. Even so, Yellen's answers reveal that the central bank’s policies are producing relative winners and losers.
Early on, Yellen explained that the purpose of the Fed's policies “is to bring down interest rates to promote spending in interest-sensitive sectors.” That’s helped autos and housing relatively more than the rest of the economy. It also makes one wonder to what extent the Fed was responsible for some of the run-up in house prices during the go-go years, given its extraordinary efforts (at the time) to suppress interest rates.
Toward the middle of the hearing, Yellen said the Fed’s asset purchases and commitment to keep short-term interest rates low boosts share prices, but also noted that many Americans benefited from falling mortgage interest rates and the parallel increases in house prices. But the biggest direct beneficiaries of lower mortgage rates were the well-to-do, who were best positioned to refinance. Although it’s certainly good that many borrowers have been lifted above water on their mortgages thanks to rising house prices, there are good reasons to be skeptical that this will generate much additional spending.
The tens of millions of Americans who own neither shares nor their own homes may have benefited indirectly as relatively wealthy people got even wealthier, but that’s not much different than saying lower taxes on the rich improve the well-being of the poor. The increase in asset prices and collapse in real yields have also meant that workers have to save a larger chunk of their incomes to get the same quality of life in retirement.
When confronted with concerns about people struggling to live off fixed incomes, Yellen agreed that “low interest rates harm savers, it’s absolutely true.” Harming at least some savers, however, may be part of the plan, at least if Yellen agrees with Charles Evans, the president of the Federal Reserve Bank of Chicago. He has argued that the threat of wealth confiscation by negative interest rates is necessary to restore spending and “risk-taking” back to “normal levels.”
To be fair, the wealthy probably hold far more safe assets than they really need. But Bankrate, a consumer financial services company, has found that less than one-quarter of Americans have enough cash on hand to cover just six months of expenses in the event of an emergency. Imposing negative rates on them in an attempt to boost consumer spending reminds me of the old saying that the beatings will continue until morale improves.
These admissions suggest the Fed’s leaders believe that the central bank boosts the economy chiefly by enriching certain people in the hope that they go out and spend their newfound wealth. The strategy is probably better than doing nothing, but it’s understandable why so many senators are troubled by the distributional impacts of Fed policy. Congress could get around these unsavory side effects by enacting broad-based tax cuts or by having the Treasury send checks directly to every American. Unfortunately neither of those ideas seems to be on the agenda right now.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)