Stiglitz: Fed’s Zero-Rate Policy Boosts Inequality

The Federal Reserve’s prolonged policies of near-zero interest rates and asset purchases have further widened the already large gap between the rich and poor in the United States, says Nobel prize-winning economist and Columbia University professor Joseph Stiglitz.

“Contrary to the presumption in the nineteenth century, where lower interest rates favored debtors over creditors and thus increased equality, we show that…lower interest rates may actually increase inequality,” Mr. Stiglitz, a long-time inequality scholar, argues in the fourth of a four-part working paper series published by the National Bureau of Economic Research.

That’s because rich individuals tend to hold much of their wealth in a stock market thatbenefits disproportionately from such policies, which included purchases of government and mortgage bonds, a program known as quantitative easing or QE.

“The composition of wealth-holdings will differ between the capitalists and life cycle savers, so that any policy which differentially benefits those assets held by capitalists leads to greater inequality. Quantitative easing did that,” he says.

Today, he said, “workers and capitalists are both owners of capital, but different kinds of capital,” with lower- and middle-income Americans rely primarily on fixed-income assets while upper-income individuals tend to invest more in stocks and other riskier assets offering higher returns.

“A lowering of the interest rate helps owners of equity and hurts those who hold government debt. This model seems to be a better description of the modern economy, and in this model, lowering interest rates unambiguously contributes to growing inequality,” he concludes.

In his critique of U.S. central bank policy, Mr. Stiglitz is breaking ranks with many of hisliberal colleagues, who have been strong advocates of continued Fed support for the economy given a lack of fiscal policy stimulus from the U.S. Congress.

In response to a historic recession and deep financial crisis, Fed officials have kept official borrowing costs at effectively zero since December 2008, and bought more than $3 trillion in mortgage and Treasury bonds.

U.S. economic growth has been modest since the recession, while inflation continues toserially undershoot the Fed’s 2% target and wage growth remains subdued.  The stock market, in contrast, has rallied to repeated records.