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New studies say Fed policy did not worsen inequality

Researchers find quantitative easing policy lessened mortgage pressure but did little to help the poor

The Federal Reserve’s practice of buying assets to inject more cash into the economy — a policy known as quantitative easing (QE) — may not have contributed to inequality after all, as previously claimed by leading economists. A new series of studies from the Brookings Institution, a Washington D.C. think tank, finds that QE may have most directly benefited middle-class households.

However, the studies found that those most in need of assistance saw fewer benefits.

In one of three papers on QE that Brookings released Monday, researchers at Northwestern University and Stanford University found that, by pumping more dollars into the economy and adding to inflation, the Fed relieved some of the mortgage pressure on middle-class households.

“When the Fed aims for higher inflation, middle-aged, middle-class households, who tend to have big mortgages, benefit at the expense of wealthy retirees, who have a lot of their savings in bank accounts and bonds,” according to a summary of the study. “Poor and young households are less affected because they are less likely to own homes, and their debt burdens are low."

Critics of QE have often argued that the policy disproportionately benefits the rich by driving up the value of financial assets, which are more likely to be held by the wealthiest segment of society. As economist Lauren Paer wrote in 2013 for the Harvard Kennedy School’s journal of public policy, “That QE is providing little help for the middle class and the poor is increasingly uncontroversial."

The Brookings Institution reports challenge that notion, as did a Monday blog post on from Ben Bernanke, former Fed chair and current distinguished fellow in residence at the think tank. Bernanke, who headed the Federal Reserve from 2006 to 2014, oversaw the three rounds of QE that followed the U.S. financial crisis and defended the policy in a post on the Brookings website.

"Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear. More research will be needed to untangle and measure the many channels through which these effects are transmitted,” Bernanke wrote. "But the (uncertain) distributional impact of monetary policy should not prevent the Fed from pursuing its mandate to achieve maximum employment and price stability, thereby providing broad benefits to the economy."

Another Brookings report issued Monday found that monetary policy appears to have little effect on economic inequality, but concluded that the central bank can slightly reduce inequality when it makes use of policies that promote full employment. A third paper found that while QE had an overall stimulative effect on the economy, it may have disproportionately benefited the regions of the country that had been least devastated by the economic collapse.

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