The Redistributive Consequences of Monetary Policy

Makoto Nakajima is a senior economist at the Federal Reserve Bank of Philadelphia. The views expressed in this article are not necessarily those of the Federal Reserve. The Federal Reserve conducts monetary policy in order to achieve maximum employment, stable prices, and moderate long-term interest rates. Monetary policy currently implemented by the Federal Reserve and other major central banks is not intended to benefit one segment of the population at the expense of another by redistributing income and wealth. Any decisions regarding redistribution are considered to be the province of fiscal policy, which is determined by elected policymakers. However, it is probably impossible to avoid the redistributive consequences of monetary policymaking. As this article will explore, households differ in many dimensions — including their assets and debt, income sources, and vulnerability to unemployment — and monetary policy affects all these factors differently. Even if one accepts the idea that monetary policy is not immune to redistributive effects, one could argue that the redistributive consequences are probably negligible if booms and recessions are mild enough that monetary policy does not need to cause large effects to ameliorate the fluctuations of the economy or keep inflation stable. The period between the mid-1980s and mid-2000s, called the Great Moderation, was such a period. During those years, the Federal Reserve conducted conventional monetary policy by making relatively small adjustments in the short-term policy target interest rate, known as the federal funds rate. However, in response to the Great Recession, the Federal Reserve moved aggressively by not only cutting the federal funds rate to essentially zero but also by implementing various unconventional measures such as communicating the expected timing and degree of future changes in the federal funds rate and purchasing large amounts of U.S. Treasury securities and mortgage-backed securities. When a central bank conducts such aggressive monetary policy, redistributive consequences might be more important. The Redistributive Consequences of Monetary Policy