WHO BEARS THE COSTS OF CONTRACTIONARY MONETARY POLICY?
Melanie Long — The College of Wooster
“Contractionary monetary policy runs the risk of quietly worsening racial and gender gaps with or without a widespread recession.”
Inflation on the scale that the US has seen over the past year poses serious challenges for low- to moderate-income families living on tight budgets. At the same time, the risk of losing jobs or income in the case of a Fed-induced recession also looms large for these families. A growing body of evidence agrees: The costs of contractionary monetary policy are not uniformly distributed across an economy and may even worsen income inequality.
Of course, other forms of social stratification coexist and interact with class and income, although their connections to Fed actions have not been as widely examined. Racial and gender inequities remain particularly stark, especially in the aftermath of the pandemic’s onset. The current moment in US monetary policy may appear at first glance to be distinct from these concerns. Yet this could not be further from the truth. Contractionary monetary policy runs the risk of quietly worsening racial and gender gaps with or without a widespread recession.
Monetary policy is neither race nor gender neutral because it interacts with a series of stylized facts about economic stratification along these dimensions in the US:
Fact 1: Black and Hispanic workers — particularly single women with children — are already in more precarious forms of employment and have higher rates of unemployment. “Uncertain, unprotected, or economically insecure” jobs are not only volatile during good economic times but are also highly vulnerable to job loss. To the extent that contractionary monetary policy reduces employment, the same groups that are overrepresented in precarious jobs are thus more likely to be adversely impacted. Moreover, work in stratification and feminist economics has emphasized that competition over scarce good jobs can heighten discrimination and conflict.
Fact 2: White, non-Hispanic men have higher median net worth than other groups. The racial wealth gap is particularly stark: Median wealth among Black households was $17000 in 2016, merely one-tenth of that of white, non-Hispanic households. This gap persists regardless of socioeconomic status. Single mothers also have lower wealth than other households, exacerbated by their high exposure to economic risk due to childcare responsibilities. Net worth is further eroded by debt, which rose among Black, female-headed households during the 2008 Financial Crisis. Recent evidence shows that Black women are more likely to hold student loan debt by age 30 than other groups.
How do these gaps in net worth relate to monetary policy? When the central bank raises interest rates, there is an asymmetric income effect on savers and debtors. Earnings on savings and some financial assets increase with interest rates. (Of course, stock market returns may fall with contractionary policy, but investors can readily move to bonds as rates rise.) The Fed supported corporate bond values directly during the pandemic, amplifying this effect. Conversely, rising interest rates cause the cost of debt servicing to rise for debtors. These channels link monetary policy directly to the already striking gaps in wealth by race and gender. They also suggest that the types of wealth held matter, not just the magnitude, leading to our final stylized fact.
Fact 3: While a growing number of women are homeowners, Black and Hispanic individuals are less likely to be homeowners than white individuals and have less home equity when they do. Persistent racial gaps in homeownership rates are a legacy of a wide range of other factors, including discriminatory government practices in the development of mortgage underwriting criteria. At the same time, increases in the number of female-headed households have prompted homeownership rates among women to rise regardless of race and ethnicity, even as men’s fall.
For both homeowners and renters, an increase in interest rates is not good news. Contractionary monetary policy is likely to depress housing prices by making mortgages more expensive. For those who do own their own home, lower prices mean a loss of or slower growth in housing wealth.
On the other hand, prospective homeowners who cannot afford rising mortgage rates must stay in the rental market. In the middle of an affordability crisis, this movement back to rentals will only serve to keep prices high. These two dynamics mean that high interest rates are likely to produce net gains for current homeowners who hold most of their wealth in financial assets, with repercussions for racial and gender inequality.
In 2020, President of the Federal Reserve Bank of Atlanta Raphael Bostic rightly called for the Federal Reserve to “reduce racial inequities and bring about a more inclusive economy.” An important first step in this direction is for the central bank to acknowledge the distributional impacts of changes to the federal funds rate and other monetary policy actions.
These impacts matter both for equity’s sake — worsening stark inequities that are often missed in broadly aggregated data — and for their potential macroeconomic spillovers. Destabilizing households that are already more likely to be financially insecure with lost incomes, unaffordable rents, and rising borrowing costs threatens the stability of the entire economic system.
