We measure and analyze the magnitude of both the earnings and portfolio impacts of monetary policy in our research, and we find evidence that both are at work.
The racial tensions that swept the United States in 2020 drew the attention of legislators, who were concerned about the breadth and durability of the income and wealth divide between black and white households. Despite modest reductions in overt labor market discrimination, advances in educational possibilities, and income growth for black households since the civil rights movement began, the disparities continue and have even widened in certain categories. According to the 2019 Survey of Consumer Finances (SCF), a white household's median wealth was $184,390, while a black household's median wealth was just $20,730. The average black household owns just around 11% of what the average white household owns. The economic disparity is narrowing, but it remains significant: black families' median income ($38,688) is 58 percent of white households' median income ($67,196).
Some central bankers believe the Federal Reserve can help to reduce racial disparities. The Federal Reserve, according to Raphael Bostic, president of the Federal Reserve Bank of Atlanta, "can play an essential role in helping to decrease racial disparities and bring about a more inclusive economy." The following is an example of a popular line of thought: A more accommodating policy reduces unemployment and raises labor income for employees who might otherwise go unemployed or stay unemployed for extended periods of time. Low-income and minority employees are frequently lured into the job market as a result of more accommodating policies. As a result, the gap between black and white unemployment rates narrows, resulting in a narrowing of the wages divide.
Nonetheless, monetary policy has portfolio implications because of its impact on asset values. If black and white families' portfolios differ systematically, asset price fluctuations have an impact on wealth distribution. We show that this is a highly pronounced truth in the data by using SCF data: black families have significantly different portfolios than white households. The median black household, in particular, has no stock assets and does not own a home. As a result, any impact of monetary policy on the pricing of such assets is largely ignored by most black people.
This raises the possibility that the portfolio effects of a more accommodating policy will work in the opposite direction of the income gains for workers of color; that is, a more accommodating monetary policy could benefit black households by lowering unemployment and increasing labor market participation and earnings, thereby helping to close the racial income gap—and, over time, the wealth gap, if some of the extra income is saved. However, accommodating policies that raise asset values may exacerbate racial wealth disparities if white families gain more than black households due to their diverse portfolio compositions and greater wealth.
We measure and analyze the magnitude of both the earnings and portfolio impacts of monetary policy in our research, and we find evidence that both are at work. Over five year periods, we look at the effects of monetary policy changes on asset values and the black-white unemployment rate disparity. We first look at how monetary policy impacts the price of homes, shares, and other financial assets to infer portfolio effects on wealth distribution. We next utilize the complete wealth data from the most recent wave of the SCF in 2019 to relate these projected asset price changes to the portfolio compositions of white and black families, and calculate the effect on black and white households' net wealth.
Our calculations always come up with the same conclusion. Over a five-year timeframe, accommodating monetary policy leads to greater increases in employment for black households, but also greater gains in wealth for white households. After an unanticipated 100 basis point accommodating monetary policy shock, the black unemployment rate declines by around 0.2 percentage points greater than the white unemployment rate. Over a five-year period, the same shock, however, drives up stock values by as much as 5% and housing prices by 2%, while cutting bond rates on corporate and government debt and pushing up inflation. Across a number of control factors, the persistent impacts on employment, stock, and property prices appear to be a consistent characteristic in the data.
Importantly, black households' employment and income improvements pale in comparison to white households' wealth gains. We show that a 100 basis point accommodating monetary policy shock results in capital gains from asset price fluctuations of around $25,000–$35,000, or 20–30 percent of an ordinary white household's mean income. The average black household, on the other hand, sees a far lower increase in wealth, at $5,000, or 10% of annual income. White households' stronger wealth gains are mostly due to the stock market, as white households own the majority of equities. Despite the fact that housing is far more evenly distributed, capital gains from the housing market continue to benefit white households disproportionately.
Taken together, the effects of accommodative monetary policy on the wealth of black and white households are comparatively large, while the effects on employment are comparatively small, highlighting the tradeoff between income and wealth inequality of white and black households for monetary policymakers. To put it another way, an accommodating monetary policy would have to have a substantially higher influence on black unemployment and income than is usually assumed to counteract the effects of even minor changes in asset prices on wealth. As a result, we argue that, as essential as closing racial income inequalities and ensuring minority families' engagement in the labor market may be, standard monetary policy measures may not be able to accomplish so without causing significant negative consequences. Through portfolio valuation effects, accommodating monetary measures that have a minimal effect on racial income inequalities are likely to expand racial wealth differences.
Note
This research brief is based on Alina Bartscher, Moritz Kuhn, Moritz Schularick, and Paul Wachtel, “Monetary Policy and Racial Inequality,” Federal Reserve Bank of New York Staff Report no. 959, January 2021, https://www.newyorkfed.org/ research/staff_reports/sr959.html.
