Sat. Oct 16th, 2021


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Unlike many on the left side of America, I have always been skeptical that ultra-low interest rates make things easier for the poor. Keep rates too low for too long encourages speculation and debt bubbles. When they burst, they always hurt those with low incomes the most, as we saw during the 2008 financial crisis.

And yet progressive people have argued for years that loose monetary policy and low interest rates are needed to promote employment, especially at the bottom of the socio-economic ladder.

That is not the case. While easy money may have helped create some wage pressures in low-wage providers, unemployment has fallen in recent years, even as the Federal Reserve began raising its interest rates from ultra-low to still low levels.

Meanwhile, it academic research has shown that the tendency of low interest rates to stimulate bubbles in the market is a major reason behind inequality, as it makes the wealthier richer, while not actually stimulating consumption and demand. In the US, the top 10 percent of the population owns 84 percent of shares. There are just so many homes, cars and jeans that these people can buy.

Graph showing the rate of unemployment against Fed funds, U3 unemployment against the effective rate of federal funds.  Percentage, 2010-20

Most people live on their payrolls. And despite some wage growth over the past six months, income remains on an inflation-adjusted basis below where they were in 2019, say Karen Petrou, managing partner of Federal Financial Analytics.

“This is the Cabbage Aid: ultra-low rates promote jobs,” she says. “But they do not.” Most people work to make money, and while central bankers can build up asset inflation, they cannot create good jobs in the middle class. Only businesses, helped by the right policy incentives, can do that. Wall Street is not Main Street.

However, the fantasy of low rates that somehow cause real growth is dying hard. Witnesses to the new progressive push to get rid of Fed chair Jay Powell, which last week concerns expressed about inflation being more persistent than previously thought. This may, of course, indicate the need for a faster decline in central bank purchases and / or faster interest rate hikes.

Of course, financial markets never want to hear that. But neither do the political left. Massachusetts Senator Elizabeth Warren calls Powell a ‘dangerous man’ for his efforts to reverse financial regulations following the 2008 crisis. showed the very unequal nature of the recovery, but also criticized Powell for saying the full employment test was ‘closer’, saying the Fed could not do it every time workers pulled back a little bit gain power to demand higher wages “.

Graph showing the real rate of return.  Effective rate of Fed fund inflation, percentage 2010-20

On the one hand, I am deeply in favor of this sentiment. I remember once having an interview with a labor activist and Fed adviser who complained that central bankers always took the box away only when ordinary people arrived at the party. Fair enough. With stock prices still near record highs and U.S. house prices rising by nearly 20 percent annually, it’s no wonder small-time investors are desperate for their cuts. Income growth will not buy you a home.

And yet the risk is greatest only when the container is about to be pulled. I’m worried about the rise of retail speculation on programs like Robinhood. I am also concerned that investors with less liquid assets are taking the biggest risks. Consider a recent Harris poll shows that 15 percent of Latino Americans and 25 percent of African Americans say they bought non-fungal tokens, compared to only 8 percent of white Americans.

It feels far too much like the phenomenon of low-income homeowners being sold in the run-up to 2008. But who can blame people for wanting a sip when savings rates are zero and inflation is 5 percent?

The real problem here is that we have left it too late to normalize monetary policy and create a more balanced economy that is not just about the asset. The perversions in our system were underlined last week by trade scandals it forced two Fed governors to resign.

But simply clearing up the ethical policy at the Fed or making sure we do not relax banking regulation (both laudable goals) does not bring the US economy where it needs to. We must all abandon the idea that low rates alone will create good jobs and income growth. We need to slow down and move slowly but surely forward with the normalization of monetary policy.

Many people will argue against it, especially as we enter a long cold winter, in which rising fuel prices will hit low-income people hard. Yet, as Petrou points out, many of them are already paying double-digit credit card rates. A slight rise in the Fed interest rate will not be a critical factor, she says, especially given the fact that rates in the US are mainly passed on by consumers to home refinancing, which is mostly by those with a high credit rating. be done.

Meanwhile, a small but positive real interest rate would enable small savers to start building a nest egg. This is a worthy cause, regardless of your politics.

rana.foroohar@ft.com



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