Lael Brainard Could Be the Next Fed Chair. She Believes the U.S. Central Bank Can Help Fix Wealth Inequality
President Biden’s decision on whether to replace Jerome Powell as chair of the Federal Reserve Board is coming down to the wire. The Board’s only known Democrat, Lael Brainard has emerged as Powell’s No. 1 challenger. Powell’s term expires in February, but nature—and financial planners—abhor a vacuum, so the announcement on who President Biden will nominate is said to be imminent. The progressives want Brainard while the stable-as-she goes folks (in this case, Treasury Secretary Janet Yellen) are happy with Powell.
The two economists are similar on many matters. Both economists would prefer to see inflation around 2%. (It’s currently at 6.2%, a 30-year high.) They would both like more Americans to have jobs. While the Fed accepts a range of 4.6% unemployment, it is still too high. However, the Fed is concerned about the labor market. Both of them seem willing to wait inflation out, rather than raising interest rates, which is the central bank’s usual tool of choice for keeping it in check. But from their public statements, they seem to disagree on how much the Fed can—or should—do to address a longer term economic issue plaguing the U.S.: massive wealth disparities.
Brainard has voted in opposition to more than 20 Fed regulations since 2018. But neither Powell or Brainard is big supporters of the decline of middle class and wide income disparities between employees and corporate bosses. Powell calls wealth inequality “a drag on the economy,” and says that stagnating incomes and low mobility are issues he is particularly concerned about. But in February, he told Elizabeth Warren that “we [at the Fed] can’t affect wealth inequality in the short term.” Besides encouraging “job creation at the lower end of the market,” Powell believes that the Fed has very few tools to deal with the widening gap between the top and bottom earners.
Brainard’s focus on inequality seems more urgent. She had already made several presentations in 2017 warning about income inequality and the dangers of uneven wealth growth. At the Federal Reserve System Community Development Research Conference in 2019, she questioned “whether middle-class living standards are within reach for middle-income Americans in today’s economy,” adding that “the average wealth of the top income decile is now 13 times higher than that of the middle-income group, while it was seven times higher in 1989,” and the gap was increasing.
Continue reading: Fed Focuses on Low-Wage Workers and Inequality as U.S. Economic Strengthens
Brainard, in contrast to Powell believes that wealth inequality should be considered when the Fed makes its decisions. “Monetary policy aims to influence employment and inflation over the business cycle,” she said at the research conference. “But the distribution of income and wealth may have important implications for macroeconomic developments, such as the evolution of consumption, which is the single biggest engine of growth in our economy. That is why the Federal Reserve has a significant interest in understanding distributional developments and their implications.”
Similarly, Brainard seems to have taken a hand in the refashioning of the Community Reinvestment Act (CRA), which aims to encourage—or force—banks to extend their services to a wider range of customers, especially those in low income and minority communities. Along with fellow Fed governor Michelle “Miki” Bowman, she met with a large group of financial institutions that serve minority populations to discuss the challenges and responses to COVID-19 in May 2020. “We must ensure that the CRA is a strong and effective tool to address ongoing systemic inequities in access to credit and financial services for low and middle income and minority individuals and communities,” she said in September last year.
Houses are an important asset in wealth creation and can only be purchased if loans are not available. These people cannot borrow money to finance higher education. It also limits their opportunities for advancement in higher paid jobs. In addition, they can’t raise funds to invest in businesses. Due to this, many are forced to take out excessive credit card debt. These are just a few of the many ways that well-regulated banks could help to build wealth. Brainard is eager to create a regulatory environment to encourage banks to get involved. “The CRA prompts banks to be not only more active lenders in low and middle income areas,” she said, “but also important participants in broader efforts to revitalize communities across the country.”
Biden’s meeting with Brainard is said to have gone well. Brainard’s appointment may have been worth it if he is aiming for a better distribution of wealth across the U.S.