What will a Powell-led Federal Reserve do?

While the Republican tax bill continues to dominate the nation’s economic news, another key event has generated relatively minor headlines: Jerome Powell’s nomination as chair of the Federal Reserve. What did Janet Yellen do to merit only a short 4-year term as Fed chair? Setting aside the possibility of sexism in this move, the larger question is this: If the tax bill locks in the income gains enjoyed by the wealthiest Americans, will the Fed’s new leader throw away the key?

Regardless of who’s been in charge, Fed policy over the past 45 years has contributed to a redistribution of income and wealth unparalleled in the history of peaceful democracies. Since the end of the gold standard, the income share lost by the middle 60 percent of the population has been gained by the top 5 percent.

The Great Recession did little to slow this down. Now, nearly a decade into a “recovery,” this separation is getting wider. The last time that income distribution looked like this was 1928, the year before a credit market collapse opened the door to the Great Depression. That is eerie, even though many point to signs that we are growing out of our economic lethargy. How real are those claims?

Take unemployment: The near 4 percent rate right now is in pretty positive, right? But look closer: At 60.4 percent, the number of employed Americans is currently 4.5 percent below where it was in the year 2000. Much of that loss happened after 2008. An aging workforce doesn’t explain it. Older workers are staying in the workforce longer, in part due to inadequate retirement funds. Labor force participation among those aged 25-44 has declined. Younger workers are actually being crowded out by older ones.

If the employment markets were improving, we would see higher growth rates in compensation for all workers. In real terms, that increase is currently below 1 percent, and it’s been falling since the Fed quit its post-crash monetary expansion in 2014.

Over the longer term, economic restructuring led by steady monetary expansion, low interest rates and increased technological sophistication — automation and robotics — has delivered a larger share of economic gains to the owners of capital, as opposed to most workers. Most now work longer and harder than ever, while real wage growth has dropped and employment has flattened out.

Ms. Yellen inherited the outcome of six years of monetary hyper-expansion. During Ben Bernanke’s reign, the Fed kept prices from collapsing and allowed the banks to remain solvent by injecting vast amounts of reserves into the banking system. This helped accelerate the growth of income disparity. As his successor, Ms. Yellen took a balanced approach at a time when there was considerable pressure to increase interest rates in response to a feared renewal of inflation.

Nobody likes inflation, but higher interest rates and taxes could be toxic. Under the Republican proposal, the wealthy and corporations get most of the breaks, while the rest of us will be stretched to pay for them.

Consider those households in the 80-95 percent range of earners. While their share of income has not changed, the adverse impact of Republican tax shifting will fall disproportionately on them. They will pay more taxes, period. And if the earnings of the middle 60 percent grow, their net gains will be minimized as they move into higher tax brackets. That’s the lock — a permanent income advantage, much greater for the top 1 percent rather than the top 5 percent.

But taxes could just be the sideshow. What will a Powell-led Federal Reserve do?

Management of the Fed in the near and long term will require a balanced and judicious approach. Recent interest rate increases have slowed things down. More rate increases may spark a price deflation, a catastrophe that was avoided by earlier expansionary policies.

What about growth? The markets aren’t really growing as much as they are consolidating the gains of the past few years. Fed policy matters here. It can keep us from collapse — but it can also create economic walls within our society. We need to keep a close eye on this story.

Janet Yellen did a good job managing tensions as Fed leader. Jerome Powell may or may not continue along her path. If taxes and Fed policy both end up favoring the wealthy, we may be starting down a road to high-tech feudalism. Do we really want to go there?

Steve Isberg is an associate professor of finance and economics in the University of Baltimore’s Merrick School of Business. His email is sisberg@ubalt.edu.

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