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Well-being disparities likely to influence Fed policy

May 25, 2021


Federal Reserve's economic well-being survey chart

The Federal Reserve’s latest report on economic well-being shows both the effectiveness of stimulus in offsetting last year’s COVID-driven recession and the bifurcating effects of the pandemic itself. Three-quarters of the respondents indicated that they were “at least doing okay” financially last year, in line with the reading for 2019 and tied for the highest mark in the short history of the series. Along these same lines, a record 64 percent of respondents indicated that they could cover an unexpected $400 expense using cash, savings, or a credit card paid off at the next statement. This metric has risen in every year since the survey debuted in 2013, when only 50 percent of adults indicated that they could cover such an emergency.

This report, then, serves as another reflection on the unusual nature of this turn in the business cycle; despite the dive in real GDP and the surge in the unemployment rate, the financial position of households on balance was just as strong at the end of 2020 as it was at the outset. Beneath the placid headlines, however, there were further signs here that the downturn gave rise to diverging outcomes. Nearly 90 percent of adults with at least a bachelor’s degree reported that they were doing okay financially last year while just 45 percent of non-high school graduates noted the same, with the former ticking higher from 2019 and the latter falling sharply.

The weight of recessions always falls unevenly – note the widening spread between the U-6 and U-3 jobless rates across recent contractions, for example – but these effects have heightened policy implications given the Fed’s increasing focus on inequality. The Fed now defines its maximum employment goal in “broad and inclusive” terms and has throughout this cycle stressed the downside risks stemming from more narrowly-driven growth.

Of course, monetary policy has played a role in exacerbating some of these measures through its sizeable influence on asset prices, setting up a bit of a feedback loop; easier policies can serve to increase wealth inequality, at the margin pushing the Fed toward a more accommodative stance. If nothing else, the diverging economic fortunes in the wake of the pandemic should be taken as anther reason to expect that the pivot toward tighter policy from the central bank is going to unfold extremely slowly.

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