“Even after the unexpectedly positive May employment report, nearly 20 million jobs have been lost on net since February”, Jerome Powell said, in prepared remarks for his teleconference with the Senate banking committee on Tuesday.
The Fed chair was attempting to underscore a simple point – namely that while May’s jobs report was welcome, the 2.5 million positions added back hardly make up for the tragedy that unfolded in March and April.
There is indeed a “V-shaped” recovery evident in a chart of the month-on-month change in payrolls. But the figure below shows the reality facing America’s labor market. The orange dot represents what Donald Trump called “the greatest comeback in American history”.
Powell’s cadence has been cautious, including during his post-FOMC meeting press conference last week.
That caution doesn’t sit particularly well with the White House, but given everything the Fed has done to backstop markets and the recovery, even Trump realizes that the steps the central bank has taken over the past three months count as extremely aggressive. Besides negative rates, there isn’t much else Trump could ask of Powell from a policy perspective. But what the president did suggest last week (and Larry Kudlow echoed the sentiment) is that the Fed chair sound more optimistic.
In any event, Powell’s prepared remarks for Congress were largely a reiteration of familiar talking points, and you can read his testimony in full below.
What I wanted to briefly point out is the following excerpt:
The burden of the downturn has not fallen equally on all Americans. Instead, those least able to withstand the downturn have been affected most. As discussed in the June Monetary Policy Report, low-income households have experienced, by far, the sharpest drop in employment, while job losses of African Americans, Hispanics, and women have been greater than that of other groups. If not contained and reversed, the downturn could further widen gaps in economic well-being that the long expansion had made some progress in closing.
Moreover, the longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures. Long periods of unemployment can erode workers’ skills and hurt their future job prospects. Persistent unemployment can also negate the gains made by many disadvantaged Americans during the long expansion and described to us at our Fed Listens events. The pandemic is presenting acute risks to small businesses, as discussed in the Monetary Policy Report. If a small or medium-sized business becomes insolvent because the economy recovers too slowly, we lose more than just that business. These businesses are the heart of our economy and often embody the work of generations.
As regular readers are acutely aware, I’ve gone to great lengths in these pages to tell both sides of the story when it comes to the Fed’s role in perpetuating inequality through accommodative monetary policy.
There are two reasons I’ve spent so much time on this subject. Those reasons are:
- It’s important and becoming more pressing by the week, as protests against racial injustice serve as a poignant reminder that inequality of all sorts is a systemic problem in the country. When viewed through the lens of equality of opportunity, this argues for a total rethink of American-style capitalism, which clearly is not working for the vast majority of the country’s citizens.
- It’s hard to get both sides of this story anywhere else, because Fed critics who, frankly, care nothing at all for the plight of the poor, exploit the situation to fuel confusion and distrust in America’s institutions, both for their own financial gain and also for the purposes of advancing narratives often associated with foreign influence campaigns.
Rather, I simply want to draw your attention to the fact that Powell’s protestations notwithstanding, the inescapable reality of the situation is that monetary policy operating in isolation and through primary dealers (on the QE side) is one of the most effective amplifiers of inequality that exists in America today.
The following chart simply shows the share of total assets held by the top 1% rising in tandem with the share of corporate equities (i.e., stocks) held by the same 1%, alongside the rise in the Fed’s balance sheet post-financial crisis.
You’ll note that the data on asset concentration is on a two quarter lag, while the Fed’s balance sheet is up to date. What is almost assured to happen barring another collapse in stock prices, is that the concentration of wealth and stocks in the hands of the 1% will slip in Q1 (reflecting the selloff in stocks) before rebounding and continuing to rise steadily after that.
Anyone who’s read Piketty knows where this goes in the event growth continues to remain subdued in developed economies. Capital will continue to gain share.
That is what I wanted to point out on Tuesday, to mark Powell’s testimony on Capitol Hill.
Powell will, of course, continue to insist that the Fed isn’t perpetuating inequality. And, as I wrote last week, there isn’t much utility in arguing the point with him, as he and critics are talking past each other.
Powell is emphasizing the necessity of the Fed stepping in to avert a calamity that crashes the economy, pushing everyone down a rung (or two), leaving the middle-class poor and the poor destitute.
Critics, on the other hand, argue that Fed policy has, for at least a decade, inflated the value of the assets concentrated in the hands of the rich, thereby widening the wealth gap.
Both Powell and critics are correct.
The problem for Powell (and developed market central bankers more generally) is that we don’t know what would have happened in the absence of Fed intervention in 2008/2009. Likewise, we’ll never know what would have happened had the Fed let the world burn in March.
What we do know, though, is that the rich are getting richer, and the poor poorer.
Jerome Powell remarks before the Committee on Banking, Housing, and Urban AffairsPowell Testimony 6-16-202