The US congress "has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates."(1)

It seems like the two objectives "maximum employment" and "moderate long-term interest rates" are at odd with each other? At the moment the interest rates are far from moderate (extremely low). From my understanding this is in order to reach maximum employment?

An interesting Federal Reserve Bank of New York staff report (2) finds that accommodative monetary policies (=QE?) leads to a small decrease in income inequality due to more jobs, but a large increase in wealth inequality.

Wealth inequality is already prevalent in the US (3).

Would changing the objectives of the Feds to: low unemployment, stable prices, and moderate long-term interest rates decrease or at least not increase wealth inequality?

(1) What economic goals does the Federal Reserve seek to achieve through its monetary policy?

(2) Monetary Policy and Racial Inequality

(3) Trends in income and wealth inequality


1 Answer 1


Could the Feds objectives be adjusted to decrease or at least not increase wealth inequality?

Trivially, answer is yes. Congress could just give Fed a mandate for lowering inequality, the same way as congress could pass a law giving Fed mandate to bring world peace or solve world hunger or conduct space exploration. US is sovereign state and Fed is government institution and technically speaking US government can assign Fed whatever mandate it in its infinite wisdom chooses to.

Would changing the objectives of the Feds to: low unemployment, stable prices, and moderate long-term interest rates decrease or at least not increase wealth inequality?

No. Wealth inequality does not just depend on interest rates. We actually do not yet fully understand what is driving wealth inequality, since data on wealth (as opposed to incomes) is harder to come by and only very recently we became able to reasonably measure it (see Zucman 2019), but there is virtually no doubt that it depends on more than just interest rates.

For example, economic growth tends to reduce wealth inequality between countries but does increase economic inequality within countries (Zucman 2019). Next wealth inequality depends on design of tax system, capital incomes (Saez 2016) and other factors as well. So just keeping moderate interest rates would not reduce inequality or prevent its increase in itself.

Fed could probably do something about wealth inequality, if it would have mandate, but it would not be as simple as keeping interest rates 'moderate'. However, this would likely often conflict with its other two mandates and thus lead to worse economic performance, and hence the lower inequality might come at a cost of worse economic outcomes.

To illustrate this point, there is some evidence showing loose monetary policy during Great Recession increased relative wealth inequality in the US (Domanski, Scatigna, & Zabai, 2016). However, it is virtually unanimously agreed by macroeconomists that loose monetary policy is necessary during recessions. The reason why Great Depression became "Great Depression" is precisely because Fed decided to follow contractionary monetary policy (see Friedman & Schwartz Monetary History of the US). Great Recession of 2008/9, as bad as it was, was not even a half as bad as Great Depression if we look at metrics such as unemployment (during GD it was $\approx 25\%$ during GR $\approx 10\%$ see Petrosky-Nadeau & Zhang 2016) or fall of output (see here discussion of drop in US output during GD and here Fred stats for GR).

Lastly, there is generally a consensus among policy economists that technocratic economic institutions, run not by elected officials but experts and technocrats, such central banks, various regulatory bodies such as Securities and Exchange Commission (SEC) or Federal Trade Commission (FTC) should deal with technical economic matters and leave matters of redistribution of either wealth or income to elected officials who still have plenty of policy tools to, at least in principle, achieve any level of relative inequality their constituency desires. In principle arbitrary GINI coefficient could be achieved through arbitrary taxation and redistribution (although the same does not hold for absolute welfare and material standards). This being said there is no economic reason why technocrats should not be in charge of inequality this comes down more to moral philosophy and to belief that equity (as opposed to efficiency) related objectives should be decided democratically.

  • $\begingroup$ According to Saez 2016: there has been a sharp increase in income and wealth inequality since 1970s. Well the US came off the gold standard in 1971 and in 1973 flexible exchange rates were introduced. According to economy professor David Howden: "The reason why there is growing income inequality since 1973 is a direct result of this monetary mayhem.": mises.org/wire/inequality-and-gold-standard $\endgroup$
    – Andy
    Commented Apr 28, 2021 at 11:22
  • $\begingroup$ Clearly wealth inequality does not just depend on interest rates. It probably also depends on tax policy, globalization and immigration. Changing tax policy may be politicially difficult. However if the monetary policy is indeed driving increases in inequality, this is hard to understand for the US population. This can lead to a polarized society and a search for scapegoats like a milder version of the hatred for jews that occured in the Weimar republic due to failed monetary policies. From my understanding this is an argument Steve Forbes and Ray Dalio are making. $\endgroup$
    – Andy
    Commented Apr 28, 2021 at 11:34
  • 2
    $\begingroup$ @Andy That mises.org article linking wealth inequality to abandonment of gold standard is just pure conjecture, and it is definitely not accepted by scientists. It also just seems to be confusing correlation with causality. For example, France went off gold standard in 1936 and data clearly show that wealth inequality in France rapidly declined wid.world/country/france. So with all respect to Howden, this completely flies in face of a hypothesis that gold standard has anything to do with this. Unless one wants to argue that gold standard magically affects inequality in US $\endgroup$
    – 1muflon1
    Commented Apr 28, 2021 at 12:41
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    $\begingroup$ differently than in France. Again peer review studies do not agree on a single reason for changes in wealth inequality. Globalization, change in institutions (decline in union memberships), economic growth, taxation, some argue there are cyclical rises and declines in inequality and to some extent also monetary policy are mentioned across literature (although not really gold standard and that argument seems to hold little water just casually looking at data) as factors affecting wealth inequality. $\endgroup$
    – 1muflon1
    Commented Apr 28, 2021 at 12:43
  • $\begingroup$ The plot on WID you linked to shows income inequality. There was a rapid decline in income inequality in France in 1936. BTW income inequality also rapidly inclined in 1931 which was the year Austria's largest commercial bank defaulted, sending economic shockwaves trough Europe. It seems that you are correct that clinging to the gold standard was a bad idea in the face of an economic depression. However for wealth inequality I find that it has been on a downward trend in France since ca. 1905 with no noticable change in 1936. $\endgroup$
    – Andy
    Commented Apr 28, 2021 at 16:11

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