MainStreet Macro: Jackson Hole

Every year at this time, some 120 prominent central bankers, finance leaders and academics gather in Jackson Hole, Wyoming, to discuss pressing global issues. The highlight of the conference is a Friday-morning speech given by the head of the Federal Reserve – this year Chair Jay Powell. 

Traders, economists, and other finance geeks hang on the speech’s every word for signs of a shift in monetary policy — essentially whether the Fed will nudge interest rates up or down.

In a sign of the times, the conference this year was held virtually due to pandemic concerns. But what was more interesting about last week’s gathering is that it focused on a subject that has been laid bare by the pandemic – macroeconomic policy in an uneven economy.

Economic “unevenness” isn’t new.  But for the last 17 months, the pandemic has exposed the lopsidedness of Main Street economic life as it collided with workers at the frontlines of the essential economy who were disproportionately low-income, women, and people of color.

Here are three ways economic unevenness has been particularly poignant during the pandemic.

1. The widening wealth gap

As of the first quarter of this year, the top 10% of households held 70% of the wealth in the U.S. Even more staggering, the top 1% now have a larger share of the wealth pie than last year (32% versus 30%).

Since the pandemic began, the stock market has climbed to new highs and is now up more than 30% compared to a typical 10% annual average. House prices, too, have soared, with home equity jumping 13% compared to a historical average of 7%. 

The Fed’s careful orchestration of monetary policy has kept rates at rock-bottom levels and aided Main Street’s economic recovery. On the flip side, it’s also fueled a rise in asset prices that further increased the gap between the haves and the have-nots.

2. The unbalanced labor market

We’ve talked a lot about the unevenness of the pandemic and low-paid workers bearing the brunt of job losses. Working women also have seen their ranks fall, hit hard by the twin impacts of an economic and health crisis for their families.

Low-paid service-sector workers shouldered the bulk of job losses from the pandemic.  At the same time, most office employees stayed on the job and were able to save on dry cleaning, commuting, and soggy cafeteria salads by working from home en masse.

Even with the job recovery well underway, African-American and Hispanic unemployment remains much higher than White unemployment due to centuries of racial inequity and discrimination. For these groups, the pandemic was a more painful economic hit.

Before the novel coronavirus surfaced, the Fed had made a case for low (not this low but still pretty low) interest rates to deliver more prosperity to these groups. And toward the tail end of the record 10-year economic expansion, low-income workers did finally begin to see meaningful wage growth.

Whether the Fed can pull this sleight of hand again will depend on the next source of economic unevenness.

3. Short supply

Initially, the pandemic hit both supply and demand, effectively shutting down a lot of both as a result of widespread business closures and social-distancing mandates. Now, with the resurgent economic recovery, demand is outstripping supply in everything from chicken wings to semiconductors. 

This has led to rising inflation that has gone well past the Fed’s 2% target for price increases. As long as inflation spikes are temporary, the Fed can continue to use its toolbox to keep rates low.  But if price growth is revealed to be more permanent — lasting more than a year – the Fed will have to pivot and raise interest rates. That could stifle the wage- and job-growth recovery that low-paid workers still need.

My Take

To pump up the economy, the Fed not only has cut short-term rates to near zero. It also has been buying $120 billion in government bonds every month. That’s helped keep long-term rates at rock-bottom levels and provided a cheap source of financing to corporations, Main Street businesses, and households. It’s also behind that vigorous growth in stocks and home prices.

In other words, Fed policymakers not only brought the punchbowl to the wealth party, they spiked it.

Now that the economy is recovering and inflation has picked up, the Fed is publicly contemplating whether it should take the punchbowl away and start winding down its large-scale bond purchases.

The Fed, for all its highbrow monetary glory, wasn’t built to fix economic inequality. Its mandates are broad yet specific – maximum employment and price stability.

That means, in terms of the Fed’s mission, leveling the playing field of an uneven economy is a nice-to-have, but not a must-have.

It also means that the uneven economy needs more than one hero to save the day.  Macroeconomic policy isn’t restricted to the Fed.  Federal and local governments, corporations, and educational institutions, among others, all have a role to play in straightening out the economy so that it works better for all of Main Street’s residents.