Uneasy money

Uneasy money

By Mario Belotti and Maria Farley

The economist: Mario Belotti giving his annual economic forecast in Feb. 2014. Photo by Charles Barry
The policies of the Fed have added more than $1 trillion toward U.S. income inequality, concludes a study by an SCU scholar and researcher. This special report first appeared on April 4, 2014, under a different title in the San Jose Mercury News.

Despite the popular observation that the Federal Reserve has successfully navigated the United States out of the Great Recession into prosperity, its “easy monetary policy” also has added more than $1 trillion to the income inequality in the United States.

This has caused millions of lower- and middle-income Americans to be set back in their financial progress by many years while wealthier, stock-owning Americans were carried to levels of wealth that might otherwise have required much longer to achieve.

A study we just concluded shows how a good part of the increase in U.S. income inequality from the beginning of the Great Recession in December 2007 to the end of 2013 has been due to Fed policy.

Beginning in August 2007, as the U.S. economy was showing signs of weakness, the Fed embarked on a policy directed at lowering interest rates by reducing the federal funds rate (the rate banks charge each other for 24-hour funds). This continued as the economy further weakened and entered into a major recession. By the end of 2008, the federal funds rate reached zero.

After that, the Fed continued to keep interest rates down by engaging in a very unusual policy of quantitative easing. It bought large amounts of U.S. government securities and mortgage-backed securities, increasing the Fed’s assets by almost $3 trillion and increasing the U.S. monetary base (currency in circulation plus bank reserves) by the same amount.

Such expansionary monetary policy over the last six years has helped the economy recover from the recession, has helped the unemployment rate decline, has helped the housing recovery, and has helped the U.S. Treasury to finance the government debt at a much lower interest rate.

But at the same time, it has contributed to the growth of income inequality. As the Federal Reserve lowered the federal funds rate, banks and other financial institutions lowered the rate they paid on saving accounts, small-time accounts, and on individual money market funds. When such rates fall by a significant amount for a long period of time, the loss of interest income by mainly lower- and middle-class households becomes quite large.

By using monthly data on saving accounts, small-time accounts (CDs of less than $100,000), and individual money market funds as published by the Federal Reserve Bank of St. Louis, and by multiplying each category of savings by their respective monthly interest rates as provided by, we calculated the actual interest income received by the account owners and compared it with the interest income they would have received if no changes in interest rates had taken place.

From August 2007 to September 2013, the cumulative total interest income loss on these accounts amounted to $1.176 trillion—$23.3 billion in September 2013 alone.

In spite of the very low interest rates banks pay on saving accounts, such accounts have continued to grow. They increased from $3.841 trillion in August 2007 to $7.034 trillion in September 2013. The more these accounts increase, given the present monetary policy, the greater the loss of interest income.

Over the same period, low interest rates have greatly benefited the upper classes because the prices of their large holding of corporate stocks greatly increased, due for the most part to low interest rates.

The purchase of government and mortgage-backed securities is now expected to end by the end of this year. After that, interest rates may start moving slowly upward. It is important to remember that the easy monetary policy is not without its adverse consequences, one of which is its impact on income equality in the United States.

Mario Belotti is the W. M. Keck Foundation Professor of Economics at Santa Clara University. Maria Farley is a research assistant in the Department of Economics at the University. This piece was written as a special report for the San Jose Mercury News.


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