When it comes to inflation, the Fed must consider inequality

the author is”Engines of inequality: the Fed and the future of US wealth

Like most central banks, the Fed has to ask why more than a decade of ultra-loose monetary policy has led to such boring economic results. The answer is that bad data leads to bad policies.

The Fed’s data is misleading because they believe that the United States is no longer a middle-class country. Until it uses data that reflects the current state of the country, the Fed will not allow the United States to return to common prosperity, just as people who use the map of New Amsterdam will find a pond in Central Park.

Its inflation measures have three obvious shortcomings. First, they omit the cost of food, energy, and housing. This is cleaner, but it fails to capture the actual needs of households and what they might do as monetary policy changes.

The second problem is that the Fed’s data is very rough—even if its preferred cost of living index accurately measures the cost of a basket of basic goods and services, they do not tell us whether households have debt-free purchasing power to afford them. The overall index of Small inflation is obviously easy to transform into painful stinginess or high-risk household leverage, each of which will have an adverse effect on the macro economy.

Finally, these indexes do not measure discretionary spending or financial elasticity in a way that predicts how price increases will actually affect consumption—on whom and how. High-wealth families can go into battle lightly and continue to manage their finances; other regions of the country must use insufficient reserves, otherwise there will be none.

Most of the current monetary policy is premised on what economists call marginal propensity to consume-the engine of demand drives demand, which then promotes employment and growth, or if it overheats, it will trigger inflation. The Fed still assumes that interest rates will drive decisions about how to use discretionary income. But the inequality of income and wealth is like this. Now only high-income families have this marginal tendency, and most of them are more than enough, so even if their margin is large, their tendency is also very small.

In sharp contrast, low-income, middle-income, and middle-income households have little ability to respond to interest rates, but they consume. These families have little ability to increase or decrease consumption in accordance with changes in interest rates, because most of them live a salary.By recent estimate, 64% of American households are either economically vulnerable or just coping.

Year after year, the real cost of living in the United States has soared—housing has risen More than 12%, A used car is Up 21%, Food costs have risen by more than 2%. The Fed has recognized some of these cost increases, but attributed them to “temporary” factors that will not lead to the sustained inflation it hopes to see before policy normalization. But it is difficult to see which structural factors will reverse fast enough to eliminate these cost barriers to family financial security.

In the absence of another severe recession, even if there is a surplus of semiconductors or wood, it will not cause any of these necessities to be heavily discounted, bringing them back to 2019 levels, let alone reaching below the median household wealth. A level that can be afforded without continuing debt.

The Central Bank of the United States has played a direct role in pushing income and wealth inequality to alarming heights, even if it is completely unintentional. It did so not only because it misread the data, but also because it misunderstood its responsibilities.

The governing law of the Federal Reserve need It seeks full employment measured by those who want to work, achieves price stability based on purchasing power, and sets “moderate” interest rates.

This is a triple task, rather than the “dual” task often cited by the Fed. It requires the Fed to have more than its preferred version: “maximum” employment and “price stability” as measured by the central bank itself.

Inflation is already a painful burden for low-, middle- and middle-income families. Released at the end of May, The latest official U.S. number Based on April prices, the annual inflation rate is 3.6%.

If the Fed allows this tax increase, it will overheat the economy if ultra-low interest rates, the Fed’s huge asset portfolio and federal government spending invest trillions of dollars into the economy without any signs of sustained recovery. Who needs it most.

Unless the Fed recognizes the far-reaching impact of inequality on the U.S. economy and quickly adjusts its policies to solve this problem, this will not have a good ending.

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