The third round of quantitative easing may be helping the rich even more than past versions, and the Fed isn't letting up just yet.
On Wednesday, the Federal Reserve's Open Market Committee, which sets interest rates, announced it would continue its open-ended asset purchase program known as QE3. It added a curveball by announcing for the first time that it was prepared to either increase or pull back on its current rate of asset purchases, depending on economic circumstances. In this third round of quantitative easing, the Fed has been purchasing $85 billion per month in mortgage-backed securities and treasuries. The committee also maintained its interest rate language, announcing it expects to keep rates at 0 to 0.25 percent at least as long as the jobless rate is above 6.5 percent and inflation is below 2 percent.
Many analysts have noted since the Fed first stepped on the stimulus gas pedal that its policies favor the upper classes far more than the poor. Low returns on assets like treasury bonds are intended to send people rushing to riskier assets, like stocks and corporate bonds. Meanwhile, low interest rates mean a lower return for savers, and some have made the case that Fed policies have lowered the value of the dollar, making gasoline more expensive.
Because wealthier Americans are more likely than their poorer counterparts to own financial assets, that means an even bigger return for those rich asset-holders. The Fed's latest Survey of Consumer Finances showed that families in the top 10 percent by income held a median of $60,000 in stocks, nearly $300,000 in bonds, and another $277,000 in retirement accounts (among families holding those assets). Compare that to people in even the above-average 60-79.9 percent range, who owned $13,000 in stocks, $30,000 in bonds, and $37,000 in retirement accounts. Most families below that level had even smaller holdings.
In addition, higher gasoline prices and lower savings interest rates could hurt average Americans both at the pump and in their bank accounts.
However, QE3 is special in the sense that it's open-ended; the Fed has said it would continue the program if "the outlook for the labor market does not improve substantially."
That makes the program especially good for the wealthy because the gradual pace of QE3 -- as well as the gradual tapering that will likely come with it -- could mean a soft landing for markets.
Consider the end of QE1 and QE2. Shortly after those programs were ended, in March 2010 and June 2011, the Dow Jones quickly lost steam, to the tune of around 2,000 points in both cases. Though external factors like U.S. fiscal deadlocks and European debt crises contributed to those plunges, the end of asset purchases likely also played a part in a softening stock market.
But because the Fed will likely take its foot off the QE3 pedal slowly, possibly even reducing the size of its purchases before ending the program, it could cushion the blow to markets after QE3 ends. Exactly when that end might come appears to still be a matter of dispute for committee members. In their March minutes, some officials advocated tapering the program at the end of 2013. However, most agreed that the purchases had boosted the economy.
"If the Fed were to remove all the stimulus all at once, sure, there would be an impact on markets. But they're going to do it gradually," says John Canally, investment strategist at LPL Financial.
In addition, it helps that the Fed intends to end QE only in a vastly improved labor market.
"That's the beauty of the outcome-based [easing] versus the time-based. When they do have to remove the stimulus, they're only doing it against the backdrop of a stronger economy," says Canally.
That means even less risk to financial assets, potentially buoying the rich even more.
The Fed, of course, undertook QE3 and low interest rates to stimulate the economy, not to boost one group of Americans over another. And indeed, Fed policies have arguably contributed to recent strong improvements in home values, which boosts wealth for many Americans. Yet the fact that middle-class and poor Americans are still struggling means that the recovery will still likely be a long time in coming.
"A lot of this hasn't flowed into the pockets of your average consumer," says Kathy Jones, Fixed Income Strategist at the Schwab Center for Financial Research. "Until we have that piece of the puzzle solved it's going to be slow going."
All of this makes it sound as if Fed policy has been disastrous for poor Americans, but that's not true. Even if it is demonstrably true that Bernanke & Co. are increasing economic inequality, easing has also arguably stimulated growth, keeping the poor afloat while it boosts stock prices.
"All else being equal, doing QE has helped the economy more than doing nothing," says Canally. "The Fed has probably created some jobs that would not have been created otherwise." He adds, however, that determining exactly how many jobs is remarkably difficult.
But the upshot may well be that while a low interest rates on savings account may be painful, without Fed stimulus Americans might have less money to put in those accounts in the first place.