Fed is powerful, except in ‘wealth inequality’

When Jamie Dimon, the head of America’s largest bank, says the US economy is in jeopardy, Federal Reserve policy makers and elected officials ought to take notice.
This detail was tucked away in a Wall Street Journal profile of JPMorgan Chase & Co’s chief executive officer published near Christmas. The article began with his near-death experience in early March just as the Covid-19 crisis was escalating worldwide, but sprinkled throughout were multiple warnings from Dimon: Without addressing the underlying economic inequality in the US, capitalism could soon meet its demise.
Dimon, of course, is hardly the first billionaire to bemoan the historically wide gap in the US between rich and poor. Ray Dalio, founder of Bridgewater Associates, has said the American dream “does not exist” because of forces like extreme political polarisation and wealth inequality. Marc Benioff, CEO of Salesforce.com, wrote about “horrifying inequality” and the need for a new capitalism in October 2019. His net worth has increased by about $2 billion this year to $9 billion, according to the Bloomberg Billionaires Index.
It’s easy to dismiss all this as cheap talk from those who benefited the most from the current system. But there’s only so much even the biggest hedge fund or largest US bank can do to address these persistent problems. The power to narrow the yawning gaps in the world’s largest
economy begins and ends in the walls of Congress. Unfortunately, for more than a decade, lawmakers have ceded much of that responsibility to the Fed, an institution that is particularly ill-equipped to address wealth inequality.
When investors are asked what they’ve learned in 2020, the answer is almost always the same: Don’t ever doubt how far the Fed is willing and able to go during periods of crisis. It added $3 trillion to its balance sheet in what seemed like a flash. It purchased corporate-bond exchange-traded funds, backstopped the municipal-debt market and injected enough confidence and liquidity into the financial system to lift the prices of just about all assets. As a result, US household net worth reached an all-time high in the third quarter.
So perhaps there’s another equally important takeaway from 2020: For all the central bank’s plaudits, its one kryptonite remains the same, whether in good economic times or bad. It’s powerless to stop the wealth gap in America from growing wider.
The reason is straightforward: At its core, the Fed sets the level of interest rates in the economy. If interest rates are low, as they are now, that props up the value of stocks and other risky assets, which are disproportionately owned by high-net-worth households. If interest rates increase, as they did in 2018, then growth is strong and wealthy individuals can park more of their accumulated wealth in 10-year US Treasuries and earn 3% or more for a decade, virtually free of risk. It’s a win-win — provided, of course, that you have a sizable amount of money to begin with.
That last part is the context that many Fed critics seem to miss. During a year like 2020, when stock markets raced to record highs even as many workers lost their jobs and small businesses folded, it’s tempting to paint the central bank as a villain; an institution always looking out for Wall Street’s traders, dealmakers and hedge funds instead of the little guys. In reality, higher interest rates and tighter monetary policy are hardly a great wealth equaliser.
Instead, those in search of a foe should focus on Congress.
Yes, lawmakers swiftly passed the Coronavirus Aid, Relief, and Economic Security Act early in 2020, which provided much-needed relief to many of those hit hardest by the pandemic. But over the course of at least the last decade, that sort of legislation has proved to be the exception rather than the norm. More typical was the excruciating back-and-forth over another round of fiscal aid that lasted for months.
—Bloomberg