Fed Policy, Inequality, and Equality of Opportunity

By Joseph Stiglitz |


In this report, Roosevelt Chief Economist Joseph Stiglitz explains how Federal Reserve policy affects and contributes to inequality in America. The Fed’s near singular focus on interest rates at the expense of full employment or effective regulation on the financial industry has hurt the economy and workers.

America has not been doing well in either equality of outcomes or opportunity. We have obtained the dubious distinction of being the country with the highest level of inequality of outcomes, and among the lowest levels of equality of opportunity, compared to other advanced economies. The American dream today is to a large extent simply a myth. The life prospects of a young American are more dependent on the income and education of his or her parents than in almost any of the other advanced countries. Wages and benefits for American workers grew at the slowest pace in 33 years in the second quarter this year.

This paper addresses two issues: First, what role has monetary policy played in the creation of inequality? What are the links between what the Federal Reserve does and the country’s inequality? And, second, what can the Federal Reserve do now to address inequality? What implications does the country’s long-standing wage stagnation have for raising interest rates? We will explain that the Fed has played a central role in the creation of inequality, both through its conduct in focusing more on inflation than on unemployment, and through its failure to regulate the financial system, in ways that would ensure stronger job creation. Today, persistent wage stagnation—in the absence of any serious inflationary threat—means that there is no persuasive reason to raise interest rates, but there are strong arguments for changing certain aspects of the Fed’s regulatory stance.

Joseph E. Stiglitz is Senior Fellow and Chief Economist at the Roosevelt Institute and a professor at Columbia University. A recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979), he is a former senior vice president and chief economist of the World Bank and a former member and chairman of the (US president’s) Council of Economic Advisers.