If there was any doubt that Janet Yellen would be a different type of Federal Reserve chair, her speech Friday in Boston removed it.
Her speech had the dry title of “Perspectives on Inequality and Opportunity From the Survey of Consumer Finances,” which seems almost intended to play down some of the conclusions she reached. By the cautious standards of central bankers, they are downright radical.
“The extent of and continuing increase in inequality in the United States greatly concern me,” Ms. Yellen said at a conference sponsored by the Federal Reserve Bank of Boston. “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”
Nothing about those statements would seem unusual coming from a left-leaning politician or any number of professional commentators. What makes them unusual is hearing them from the nation’s economist-in-chief, who generally tries to steer as far away from contentious political debates as possible.
Consider, for example, the approach the last Fed chief took when he gave a speech on the same topic. Instead of raising the possibility that a widening gap between rich and poor could be contrary to American values, here’s what Ben Bernanke said in a 2007 speech to the Great Omaha Chamber of Commerce: “I will not draw any firm conclusions about the extent to which policy should attempt to offset inequality in economic outcomes; that determination inherently depends on values and social trade-offs and is thus properly left to the political process.”
Ms. Yellen’s speech is a thorough airing of some of the latest research on how much inequality has widened in recent years and why. In the course of 4,300 words, she explores the role of rising debt loads poor students must incur to get a college education, a slowdown in small-business formation, and trends in inheritances, among other issues.
But in many ways the issues she leaves out are more instructive. In particular, she stays away from the aspects of the inequality puzzle that have a close tie-in to the policies of the Federal Reserve.
First, there is a growing body of evidence — far from proven, but certainly gaining traction — that income inequality could be a significant force behind disappointing overall economic growth over the last 15 years.
The story goes like this: The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn. Because a rising share of income is going to the wealthy, spending — and hence aggregate demand — is rising more slowly than it would if there were more even distribution of income. Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.
If true, this would help account for why the economy has notched mediocre growth since the turn of the century, with the exception being a brief period of the housing bubble.
It would also have big implications for Fed policy. It would imply that, under the current economic arrangement, the nation’s potential economic growth is lower than it might otherwise be. Which implies that it would be dangerous for the Fed to try to seek growth much faster than that using monetary policy, as doing so might unleash inflation, financial bubbles or both.
A second area in which monetary policy interacts with inequality — and which Ms. Yellen also leaves unaddressed — is the role of the Fed’s easy money policies in encouraging inequality.
For the last five years of economic expansion, Congress has been unwilling to use fiscal policy to try to encourage faster growth. That has left the Fed as the only game in town, and the Bernanke Fed again and again turned to quantitative easing and ultralow interest rate policies to try to shock the economy into speedier expansion. (Ms. Yellen was the No. 2 official at the Fed for most of this time, and helped engineer the policies).
But this has contributed to an imbalanced form of growth in the United States. Many of the first-order effects of the Fed’s bond buying have been, for example, to drive up the stock market and to help lower mortgage rates. Because stocks are disproportionately owned by the wealthy and the upper middle class have been in best position to refinance their mortgages, the benefits of Fed policy for middle and low-income workers have been more indirect.
It is unclear what that means for the proper course of monetary policy. If quantitative easing policies led to stronger overall growth that are the reason employers are adding more jobs, then the trickle-down benefits for ordinary workers are still meaningful. But Ms. Yellen did not address in her speech whether she agrees with the premise that a Fed-driven economic recovery has contributed to inequality, and if so what it implies for her agency.
It seems like Ms. Yellen offered this speech as a way to use her bully pulpit to cast public attention on an issue she cares about deeply, deliberately avoiding areas where inequality intersects with the policy areas under which she has direct control. And it is true that the future of inequality in the United States is surely shaped more by decisions on the levels of certain taxes and the size of the social welfare state more than by anything that the Fed does.
Perhaps in future appearances, Ms. Yellen will give us a sense not just of what is wrong with inequality, but what it might mean for the policies over which she has some control.