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At his news conference in May, Federal Reserve Chairman Jerome Powell declared that the Fed’s extraordinary measures taken in response to the COVID19 pandemic “absolutely” do not increase wealth inequality in America.
But an analysis of data going back two decades shows that is absolutely wrong: Over the tenures of four Fed chairs — Alan Greenspan, Ben Bernanke, Janet Yellen and Powell — rates have fallen precipitately and the central bank has engaged in several rounds of massive securities purchases, or quantitative easing (QE), which clearly have helped wealth explode for the top 1% and even the top 10% of Americans, while stagnating for half of the country.
In the fourth quarter of 2000, when the federal funds rate stood at 6.5% and recession fears were growing, Greenspan started cutting rates and didn’t stop until mid-2003 when fed funds hit what was then an all-time low of 1%. Those moves set off the final blow-off top of the housing bubble and a cyclical bull market in stocks.
In the fourth quarter of 2000, the top 1% of wealth holders had a household net worth (assets minus liabilities) of $11.82 trillion, while the top 10% had $14.62 trillion, according to Federal Reserve data. By the fourth quarter of 2019, before the coronavirus hit, wealth for the top 1% had more than tripled, to $36.3 trillion, and nearly tripled for the top 10%, to $41.18 trillion.
But for the bottom 50% — the “other half” — total wealth rose from $1.42 trillion to only $1.56 trillion, about a 10% increase over 19 years — effectively no increase at all. Since the bottom of the Great Recession in early 2009, household wealth of the top 1% has surged 150%, while the bottom 50% saw its wealth rise by two-thirds, to a much smaller number, of course.
Stock ownership
Why do the very rich do so well? “The middle class tends to invest mainly in homes, and the very rich tend to invest mainly in stocks and businesses. Over time, the rate of return on stocks and businesses is higher than that on homes,” says Edward N. Wolff, an economist at New York University and one of the nation’s leading experts on inequality.
A comprehensive study he did showed that “the richest 1% received 45% of the total gain in marketable wealth over the period from 1983 to 2016.” That’s because the top 1% of households owns 40% of all stocks (including in mutual funds and retirement accounts) and the top 10% owns 84%, Wolff found.
The period his study covered coincided, of course, with a global secular decline in interest rates engineered by the late Paul Volcker in the early 1980s. Lower rates drive prices higher for stocks and bonds, and as Wolff points out, “it’s the very wealthy that hold almost all the bonds” as well.
Since Greenspan, the Federal Open Market Committee has reacted swiftly when stock or bond prices plummeted. Remember the “taper tantrum” of 2013, when markets freaked out after Bernanke even hinted QE had to stop at some point? Or the nearly two years it took Yellen to start raising rates from zero when the crisis was clearly over and the economy was growing? Or Powell putting the brakes on rate hikes after stocks plunged to nearly a 20% bear market decline in December 2018? Under his three successors, the “Greenspan put,” in which Fed actions have effectively put a floor under stock prices, has been institutionalized.
Fed policy, says Wolff, “plays a large role and probably explains at least 25% of the rise in stock prices” over this period. Fed officials did not return a telephone message requesting comment by deadline.
This time, during a pandemic and with the official unemployment rate still above 10%, the Fed has boosted its balance sheet by $3 trillion so far and Powell has said he would do whatever it takes for as long as necessary to support the economy and preserve jobs. That, and the hope for a vaccine early next year, have pushed the S&P 500 Index SPX, -0.01% to just shy of its all-time highs while coronavirus cases and deaths continue to soar in the U.S. A near-record S&P 500 is very good for the very rich.
Other factors
The Fed, of course, is not primarily to blame for structural wealth inequality in the U.S. Technological advances, globalization and trade policy that favored China, supply-side tax cuts for the rich, the decline of private-sector unions, the obsessive focus of financial markets on shareholder value and a winner-take-all economy that lavishly rewards “superstars” all played huge roles over the past few decades. Yet the Fed’s actions have helped widen the gap.
When Powell denied that Fed policies promote inequality, he added, “Everything we do … is focused on creating an environment in which … people will have their best chance to keep their job or maybe get a new job.”
But can’t policies that aim to prevent the very worst from happening also disproportionately help the rich?
“The Fed has indeed helped a lot of working-class families, has saved jobs,” says Wolff. “But at the same time, it’s also indirectly benefited the wealthy, in terms of keeping stock prices high and rising.”
“It’s hard to believe they’re not aware, but they would be pretty naive not to realize it,” he says.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold and read his first post, “The Police Are Abolishing Themselves,” on his new Substack newsletter “Sheer Heresy.”
