Merryn's Blog

The best way for the Federal Reserve to tackle wealth inequality in America

If Janet Yellen is serious about addressing income inequality in America, she should start with the taper, says Merryn Somerset Webb.

I'm a bit late to this, but having been away last week, I have only just got round to reading Janet Yellen's speech from last week on the matter of income and wealth inequalityin America.

She is "greatly concerned by it". She worries that it isn't compatible with American values. And she suspects that it is hitting the "equality of opportunity" that Americans mostly believe they have.*

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This is fascinating stuff. That's first because inequality isn't considered any of Yellen's business. She doesn't actually recommend any policies for remedying the situation, but her preferences come over loud and clear.

That hits the wrong note for the simple reason that she is an unelected official with a clear mandate to deal with inflation and employment levels, not to influence or comment on social policies (which should surely be left to democratically elected members of government and the political process).

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The second reason is that the Fed caused a good part of the wealth inequality currently present in the US, so hearing its leader lamenting its rise is distinctly odd.

The main effect of quantitative easing (QE) so far has been to push up asset prices in the US (which is why the stock market is near historic valuation highs).

Given that the rich hold more assets than the poor, it has clearly been a factor in rising wealth inequality. So, if Yellen is so worried about inequality and she feels it is somehow her job to do something about it, she has an easy way forward: accelerate the tapering and sell the Fed's bond holdings back into the market.

That won't make the rich happy, and I'm not entirely sure it will do much for the poor in the immediate either. But it will certainly reduce inequality. Job done.

* There is much talk in the US about falling social mobility and the end of the age of opportunity but it hasn't changed much in the last 50 years or so. Being born poor doesn't limit your path up the ladder any more today than it did then.

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