WASHINGTON — The Federal Reserve's accommodative monetary policy and post-crisis regulatory structure is having an unintended and counterproductive effect: it's making it harder for ordinary Americans to get ahead.
That argument, detailed in a paper released Monday by Federal Financial Analytics, analyzed academic research from across the globe — including from the Fed and the Switzerland-based Bank for International Settlements — to assess the impact of the prolonged ultralow interest rate environment on asset prices. The conclusion is that while those accommodative policies have spurred economic activity in some areas, it has primarily resulted in the growth of assets like equities and securities that are disproportionately held by the wealthy.
Other assets — namely housing — have not recovered in the same fashion, and post-crisis regulations have created new and unintended barriers to homeownership that are keeping many low-income households from accumulating wealth.
"It's clear that the [Federal Reserve Board] does not want to make low- and moderate-income households poorer — quite the contrary," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "But income inequality is nonetheless rising faster and more sharply than it otherwise would due to the FRB's actions. As a result, careful attention needs quickly to be given to why the FRB's ambitious effort to promote robust economic recovery is in fact only making the rich richer and the financial system still less stable."
One of the most immediate dangers posed during the financial crisis was a surge in unemployment and vast swaths of so-called toxic assets being held by the largest and most systemically risky banks. To combat both problems, the Fed embarked on a two-pronged strategy: lowering interest rates to almost zero to spur demand — and by extension spurring demand for labor — and to purchase those toxic assets in order to firm up the banks' books.
The long-term macroeconomic effect of those policies has been a gradual flight of capital toward assets most availed by the wealthy, like stocks and bonds. Lower-income households traditionally accumulate wealth through homeownership or insured deposits — assets whose value were severely curtailed by the crisis in the case of home prices, and that have been severely limited by the low-interest-rate environment in the case of deposits, the paper said. That has resulted in a state of affairs where the wealthy are getting richer and it is harder for the poor to get ahead.
"The wealthier one is, the more one depends on assets like stocks and bonds, while the farther down the income spectrum one goes, the more likely it is that a home is one's major wealth-producing asset," the report said. "In the period immediately following the crisis, the asset-growth differential between the richest quintile and second-poorest quintile was between four and eight percent, furthering inequality as a result of rising stock prices and flat or negative housing returns. Even though housing started to function as an inequality-decreasing force around 2012, stock returns have still grown at a faster rate, resulting in asset growth differentials generally around two percent in this period."
There have been important regulatory changes that have evolved since the crisis as well, the paper says, that have similarly discouraged or complicated low-income individuals from being able to rely on bank deposits as a means of storing and accumulating wealth. The liquidity coverage ratio and net stable funding ratio encourage banks to fund their operations with reliable funding sources and discourage less-stable sources like short-term wholesale funding. But other rules — namely the total loss-absorbing capacity rule, leverage capital ratio and supplementary leverage ratio — effectively penalize those deposits.
"The more assets on a bank's balance sheet subject to high capital requirements regardless of risk ... the greater the difficulty banks have in holding assets that promote economic growth, comply with capital regulation, and ensure sufficient return on investment to be viable, competitive private enterprises," the paper said.
The paper was funded by the Clearing House Association, a trade group representing the largest banks, but that funding does not reflect editorial authority over the paper's conclusions, the report said.
Concerns about the impact of the Fed's monetary policies have been raised before. Republicans routinely question Fed Chair Janet Yellen about the impact of low interest rates on those who rely on their savings as a source of income during her semiannual testimonies in Congress. But the central bank has maintained that such accommodative policies are meant to spur hiring — part of the agency's dual mandate to control inflation and maximize employment.
Monday's paper challenges that assertion by suggesting that accommodative monetary policy alone is insufficient to achieve those goals in a long-term way, and may provide fodder to hawks that are pushing for a more aggressive tightening of monetary policy.
The paper also provides a counterpoint to the narrative forwarded by the Fed Up campaign — a grassroots movement dedicated to increasing diversity in the Fed's leadership and maintaining low interest rates in order to maximize employment in communities of color. That campaign said it will push for a more open and inclusive search process for identifying a replacement for Atlanta Fed Bank President Dennis Lockhart, who announced his retirement last week.