Photo credit: Andrew Harrer / Bloomberg
Photo credit: Andrew Harrer / Bloomberg
Jerome Powell likes to point out how the Federal Reserve’s policy to prolong growth helped low-income Americans get jobs and pay increases.
But after the coronavirus destroyed those gains, the Fed chairman’s zero-rate bailout fails to help the most vulnerable in the job market. Instead, you may end up widening inequalities.
New research by Fed economists shows how badly pandemic-era job losses skewed against the poor, who got fired at four times the rate of those who earn more. Women and minorities were especially affected, according to data from the Department of Labor.
Long way back
Quarterly U.S. unemployment rate
Source: Bureau of Labor Statistics / Forecasts compiled by Bloomberg
“The pandemic exposed how fragile the job market was,” said Valerie Grant, senior fund manager for AllianceBernstein’s US equity portfolios. While the Federal Reserve’s approach to addressing labor inequalities is “laudable,” she said, “I don’t know if it will bring about real change. There are limits to what only monetary policy can do.”
Buck stops
Powell himself is making that point with increasing urgency as inequalities increase.
While the labor force faces a long routine to regain its pre-crisis position, capital markets have returned strongly, largely thanks to the multi-A trillion dollar bailout that the Fed helped orchestrate.
At the end of May, employment among a fifth of the lowest-paid Americans was still about 30% lower than February levels, according to a document released by Fed economists this month. At that point, U.S. stocks – whose ownership The biases towards the wealthy and the whites … had recouped most of their losses and had fallen approximately 10% from the year’s highs.
Two tracks
Annual change in:
Source: Bloomberg, Atlanta Fed GDPNow series
Powell and his colleagues strongly deny that their policies are exacerbating inequality. They say they will do everything in their power to get the United States back to the 2019 hot jobs market, including keeping interest rates close to zero for the foreseeable future.
Read more: Powell says Fed policies “absolutely” don’t add to inequality
But the Fed chief bluntly tells the officials in charge of US government spending that in the fight to avoid a depression, the money largely stops with them.
On Tuesday, Powell will testify jointly with Treasury Secretary Steven Mnuchin in Congress, where lawmakers are debating whether to add to the $ 3 trillion pandemic stimulus they approved, or start marking it again.
‘Long way back’
Throughout the world, governments are turning to fiscal policy to lift their economies from the worst depression of generations, amid a growing consensus that monetary policy, the central tool of economic management for several decades, is is running out of way.
In the United States, “for the least qualified and educated, it will be a long, long way back,” said Mark Zandi, chief economist at Moody’s Analytics. “The Federal Reserve can only take us part of the way.”
Full employment recovery will likely require policies such as a broader provision of childcare and training for children, and investments to create infrastructure jobs, Zandi said. “It will take a lot of support from the federal, state and local governments to get us back, even with the Fed’s foot on the gas.”
About 20 million Americans Remain unemployed, data released Thursday showed. The unemployment rate for African Americans, which hit a record low of 5.4% last year, stood at 16.8% in May. Almost one in five Hispanic women is out of work.
Those numbers, at a time when riots sparked by racial and economic injustice are already affecting the nation, are at risk of fanning the flames. And the latest virus reports, showing a resurgence of cases across the country as the economy reopened, have delayed hopes of a relatively quick rebound.
Ice Age
The United States has suffered the worst job losses since the 1930s
Source: Bureau of Labor Statistics.
Before the pandemic, Powell had been able to point out the benefits of managing a tight or hot job market, with unemployment levels lowest in 50 years helping to erode inequalities. In his testimony before Congress this month, he warned that the current depression could have the opposite effect.
“If not contained and reversed, the recession could further widen gaps in economic well-being,” he said.
Red lines
The central bank crossed its own “red lines” during the rescue efforts, buying junk-rated debt and loans to local governments. The Fed lowered its benchmark interest rate to zero, and “doesn’t even think about thinking about” raising it, according to Powell.
Congress has played its part, with tax measures including grants to help small businesses and reinforced unemployment benefits. Some Republicans are now reluctant to extend the measures as they gradually expire in the second half of 2020.
“It would be a concern if Congress were to withdraw from the support it is providing too quickly,” Powell told the House panel. He drew a quick rebuke from the high-ranking Republican on the panel, who said fiscal policy is a matter for Congress, not the Federal Reserve.
‘More useful’
Since the beginning of his tenure, Powell has shown interest in pushing the Fed’s monetary policy as far as possible in the direction of maximum employment, which he is legally bound to fulfill, and questioning whether this task of the right way. last.
At a hearing in July 2019, Powell agreed with Rep. Alexandria Ocasio-Cortez, champion of the progressive left, said the Fed was wrong about its previous estimates of full employment. One consequence of this is that central banks raised rates too quickly before letting the economy’s job creation engine spread profits to minority communities.
The problem is that such ideas, about how a high pressure economy can reduce inequality, will probably not be applicable for a long time. At least, not by the central bankers.
“Monetary policy could be reaching its limits,” said John Briggs, head of strategy for the Americas at NatWest Markets.
“The central bank can support the fiscal side, which is what they have been doing,” he said. But putting money directly into consumers’ pockets, or extending unemployment benefits, will be much more useful. Unlike if the Fed buys $ 10 billion or $ 100 billion in corporate bonds. “
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