Fed's Brainard Warns Economic Inequality Could Hurt U.S. Growth -- 3rd Update
September 26 2017 - 1:23PM
Dow Jones News
By Harriet Torry
WASHINGTON -- Increasing inequality in income and wealth,
including the widening gulf between the fortunes of people in urban
and rural areas, threatens to limit U.S. economic growth, a Federal
Reserve official warned Tuesday.
"Much of the gains in employment, income and wealth since the
end of the recession, and more broadly over the past few decades,
have accrued to workers and families in larger cities," Fed
governor Lael Brainard said, citing data to be released Wednesday
in the central bank's latest Survey of Consumer Finances.
Since some workers and families find it difficult to move, this
concentration of economic opportunities in larger cities could hurt
"the well-being of these households and, potentially, the growth
capacity of the economy as a whole," she said at a central bank
conference on employment disparities in Washington.
More broadly, rising inequality reduces the long-run productive
potential of the economy, she said, given its implications for
consumer spending.
"Some research suggests that widening income and wealth
inequality may damp consumer spending in the aggregate, as the
wealthiest households are likely to save a much larger proportion
of any additional income they earn relative to households in lower
income groups that are likely to spend a higher proportion on goods
and services," according to Ms. Brainard.
The top 1% of U.S. households reaped 24% of the nation's income
in 2015, up from 17% in 1988, Ms. Brainard said, citing the
survey.
The share of wealth held by the top 1% rose to 39% in 2016, from
30% in 1989, she said.
The survey found persistent racial and ethnic differences in
income and wealth, she said. The average income for white families
in 2015 was about $123,000 a year, compared with $54,000 for black
families and $57,000 for Hispanic families.
On a geographic basis, the average annual income for families in
metro areas was about $25,000 higher than for families in nonmetro
areas, and the average wealth holdings for families in metro areas
exceeded average wealth for families in nonmetro areas by nearly
$500,000 -- gaps that have more than doubled over the past three
decades, Ms. Brainard said.
She noted, however, that while the geographic differences in
average family income and wealth have grown, there has been little
change in the medians -- or points at which half are higher and
half are lower -- because in larger metro areas income and wealth
increasingly have gone to wealthier families.
Ms. Brainard said the opioid epidemic appears to be particularly
acute in smaller cities and rural areas. Factors behind the trend
"may be related to the drop in labor demand: The despair related to
diminished prospects of a stable and quality job may lead to
substance abuse and related health or mortality concerns," she
said.
Ms. Brainard didn't comment directly on the path of interest
rates. Earlier this month, Ms. Brainard said the Fed should be
cautious about raising short-term interest rates further until
policy makers are confident of overcoming the "persistent failure"
to reach their 2% inflation target.
The Fed last week left its benchmark short-term rate unchanged
in a range between 1% and 1.25%, while officials indicated they
expect to lift it before year's end.
Central bankers have long looked to a theory known as the
Phillips curve which holds that falling unemployment pushes up
inflation, requiring tighter credit to keep price pressures in
check.
Fed officials are puzzled because, contrary to what the Phillips
curve would predict, inflation has remained weak despite solid, if
moderate, economic growth and low unemployment, which was at 4.4%
in August. The Fed's preferred annual inflation gauge, excluding
volatile food and energy categories, was 1.4% in July, down from
1.9% in January.
Ms. Brainard has voiced skepticism about the theory in the past,
and she said Tuesday that "the traditional Phillips curve
relationship is flatter than in the past, which means that price
inflation is likely to be less informative regarding labor-market
tightness than it was previously."
Write to Harriet Torry at harriet.torry@wsj.com
(END) Dow Jones Newswires
September 26, 2017 14:08 ET (18:08 GMT)
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