With QE3, We All Win -- Poor and Rich Alike
Today’s Federal Reserve announcement is a big deal. We’re not just getting another round of quantitative easing, but an open-ended one that will continue until the labor market improves.
And accommodative monetary policy will continue “for a considerable time after the economic recovery strengthens,” with short-term rates at or below 0.25 percent through mid-2015.
This is great news for the labor market and the economy, and the markets are reacting as such: As of 1:30 PM, the S&P 500 is up 1.3 percent on the announcement. This is consistent with past experience: We have repeatedly seen that when the Fed announces easing, the equity markets react favorably.
When the Fed wasn’t being so easy, it came under fire from (among others) Paul Krugman for acting in the interests of a “rentier class.” This is a group of wealthy bankers and bondholders that benefits from low inflation and doesn’t have to care about unemployment, and therefore desires excessively tight monetary policy.
By that logic, the rentier class lost out today. But I’m not sure the rentier class even exists.
While overly tight monetary policy has hit the unemployed the hardest, it has been bad for almost everybody, including rich people. It’s true that disinflation has been good for certain securities, particularly low-risk bonds. But wealthy bondholders also tend to be wealthy stockholders, and Fed policies that hold economic growth down are bad for equities. Most advocates of hard money are simply making a mistake, not putting their interests ahead of the common good.
The great thing about good policy is that it is a positive-sum game. A Fed that credibly promises to ease until unemployment falls will both put people back to work and grow the economy faster, driving up stock prices. That's a win for capital, a win for labor and, if he gets credit for an accelerated recovery, a win for Ben Bernanke. As Michael Scott might say, it's a win-win-win.
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