Fed pitches its inflation fight as fight against inequality

WASHINGTON (AP) — As the Federal Reserve ramps up its efforts to tame high inflation, its top officials are casting their aggressive campaign in a new light: as a blow against economic inequality.

This thinking marks a sharp reversal from the Fed’s traditional view of using interest rates. In general, the Fed’s rate hikes for the coming months would be seen as a particular threat to disadvantaged and low-income households. These groups are most likely to suffer if rate hikes weaken the economy, increase unemployment and sometimes cause recessions.

Instead, some of the most intrepid Fed officials, who generally favor lower rates to nurture the job market, are now going out of their way to point out ways in which inflation hits hardest on poor Americans. Is. He argues that curbing high inflation is an issue of fairness.

The “burden of higher prices” is especially great for homes with more limited resources, Lyle Brainard, an influential member of the Fed’s board of governors and longtime interest rate pigeon, said in a speech Tuesday. That’s why reducing inflation is our most important task.

Brainard noted that food and energy together accounted for one-fourth of the price increase that pushed inflation to a 40-year high. Poor Americans spend about a quarter of their income on groceries and transportation, she said, while wealthy families spend less than a tenth.

Members of Congress from both parties generally agree that the Fed should tackle the increase in inflation by continuously raising rates, which would make many consumer and business loans expensive. In fact, most economists have said the Fed has waited too long to do so and now risks tightening credit too quickly and derailing the economy. Last month, the Fed raised its key rate from near zero to 0.5% from 0.25%.

Still, some Democrats have expressed concern that higher rates would significantly reduce hiring, while unemployment for black workers, for example, remains higher than for whites.

“When it comes to making sure everyone has a good quality job, we have to clearly There’s a long way to go.” Fed chair. “Rising interest rates too quickly can stifle job growth.”

Tim Dew, chief US economist at SGH Macro Advisors, and some other analysts say the Fed is right to highlight the damage that inflation can do to Americans’ ability to afford basic necessities like food, gas and rent. But they also suggest that some recent Fed comments have heightened the belief that inflation worsens economic inequality.

Nathan Sheets, Citi’s global chief economist and a former Fed economist, for example, notes that inflation lowers the debt burden, which can disproportionately benefit low-income Americans. Wages generally rise to keep up with inflation. But mortgages and other loans usually carry fixed interest rates, which makes them easier to pay off.

Brainard’s speech this week was one of the clearest examples of the Fed’s argument that inflation could exacerbate inequality. Brainard, who is nominated for the Fed’s No. 2 role and is part of Powell’s inner circle, said that low-income households – defined as the poorest one-fifth – spend 77% of their income on food and housing. including necessities. In contrast, the richest one-fifth spend just 31% of their income on those categories.

Similarly, Mary Daly, chair of the Federal Reserve Bank of San Francisco and a long-time crackdown on the Fed’s policy-making committee, surprised Fed watchers this week when she announced that “inflation remains the same as As harmful as not having a job.”

Daly said in the comments, “I understand … that if you have a job[but]you can’t pay your bills, or feel like I can’t save up for what I have to do, So it keeps you up at night.” For the Native American Financial Officers Association.

Brainard said in his speech that poor people often pay more for the same item. High-income households, for example, can afford to stock up on buying wholesale or selling an item at a discount, which lowers their cost per item.

And when inflation rises, Brainard said, families buying name-brand cereals can switch to cheaper store brands. But poor consumers who are already buying the cheaper stuff can’t afford a similar value-reducing switch.

Powell himself began shifting his rhetoric in this direction during Congressional testimony last winter, Dew said, when the Fed chair noted the harsh effect inflation has on deprived Americans. Powell did not raise that concern in a previous testimony in September.

It was a notable change for the Powell Fed, which has focused on inequality in the job market compared to its predecessors. In August 2020, the Fed updated its policy framework to specify that the goal of maximum employment was “broad and inclusive.”

This meant that the Fed would consider unemployment rates for black and Hispanic workers, rather than just headline figures, in setting its interest rate policies. The central bank also said that it would no longer raise rates in anticipation of higher inflation, but would wait until higher prices were actually done.

Brainard in a speech in February 2021 highlighted one reason for taking a more patient approach. In those comments, he said raising rates to pre-empt inflation “could undermine progress for racial and ethnic groups that have faced systemic challenges.”

Powell and other Fed officials say they now aim to contain inflation by slowing growth, but not stopping. They say that reducing high inflation is important for the economy to expand and ultimately to keep unemployment down.

For now, Sheets suggested, the Fed can raise rates without worrying too much about hurting the job market because its benchmark rate is so low. Fed officials don’t think their key rate will begin to halt growth until it reaches around 2.4%.

Minutes of the Fed’s most recent meeting in March, released on Wednesday, showed that officials want to reach that level “rapidly”, and economists expect them to do so by the end of this year. At that point, if inflation is still too high, the Fed may have to raise rates further, to the point where layoffs occur and the risk of a recession increases.

“That’s when it will get sticky and challenging for the Fed — when those short-run trade-offs arise,” Sheets said.

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