MICHEL MARTIN, HOST:
The Federal Reserve has raised interest rates eight times over the last year. The Fed chair has said many times the goal is to rein in inflation. But a recent paper by a Federal Reserve economist argues that these rate hikes are also doing something else - making the wealth gap worse by pricing a number of low- and moderate-income Americans out of the housing market. We wanted to hear more about this, so we've called Darrick Hamilton. He is a professor of economics and urban policy and director of the Institute on Race, Power and Political Economy at The New School in New York City. Professor Hamilton, thanks so much for joining us.
DARRICK HAMILTON: Well, thank you for having me. I'm a big fan and admirer of your show.
MARTIN: Oh, well, thanks for that. OK. So first, I'm going to ask you to give me the introductory class. Why are interest rates so critical when we're talking about things like inflation and the economic recovery, broadly defined?
HAMILTON: Well, they drive up the cost of borrowing. So with higher interest rates, the amount that one has to pay in terms of debt financing rises. And as a result, they end up pricing various people out of the market, particularly those people that don't have large capital foundations by which they begin, so a larger amount of the payment for the asset, like a home, is financed. And again, higher interest rates require that that cost that they have to pay for finance is higher.
MARTIN: So it might not necessarily drive up the price of the asset, but it would drive up the cost of the money that you would borrow to buy it.
HAMILTON: That's exactly right.
MARTIN: OK. So earlier this year, a Federal Reserve economist named Daniel Ringo published a paper on monetary policy and inequality. I'm just going to read a little bit of it before I get your reaction. And obviously, I'm going to skip some of the - sort of the technical terms that a lot of us wouldn't use. But in the paper, he writes, quote, "I find that tighter monetary policy leads to greater inequality in ownership, in contrast to the literature that finds reduced wealth inequality based on asset prices. The effects of homeownership on wealth take time to accumulate. So the influence of this access channel on wealth inequality would accrue only with a considerable lag."
I think he's saying a couple things here. I think he's saying that higher interest rates leave a lot of lower-income people out of the housing market, and obviously that matters because this prevents them from accessing a major vehicle for wealth creation - that's buying a home. I think he's saying that the Fed's idea is that if you raise interest rates, the prices will come down and that lower prices help everybody - that that's not necessarily the case. And I think he's saying that the people who are left out stay out. So is that about right?
HAMILTON: I mean, it really is. It is clear. But, you know, I want to make sure we don't lose sight of the major problem by which we begin, which is the capital in the first place to purchase the asset. So as a result of not having that capital, you have to finance a bigger portion of the home purchase. And in the scenario, as described by the author, when there's higher interest rates, the cost of financing that purchase is higher.
MARTIN: And what about this argument that he's saying, that people who are left out stay out? I think what he's saying is that people who are left out often stay out, and that really does have long-term consequences for wealth inequality. Do you think that that's true?
HAMILTON: I do think it's true. And again, I want to be careful that we don't lose sight of what the core issue is, which is capital to begin with. But nonetheless, there are things we can do to make the problem worse - continuing to raise interest rates to the point that not only do we overshoot our target of price stability, but we do it in a way where the interest rate, which is a blunt instrument, is not considering some of the distributional impacts, such as the population that the author is talking about - the fact that these low-income individuals now are pretty much locked out of the market because they can't get into it, given how much it's going to cost to finance that home.
MARTIN: So the issue of wealth inequality certainly isn't new, but for the people who care about this, they've cared about this for a long time now. But is there something about this moment and the Fed's response to it that makes this moment particularly notable that you think we should focus on or think about?
HAMILTON: Yeah. I mean, we've made advances so that the Fed, at least in their rhetoric, is starting to discuss the impact, distributionally, of their actions. And what do I mean by that? The impact on race, the impact on lower-income populations. I don't think that's always been the case. Usually, it's been very high-level macro impact. However, rhetoric is not enough. I think the Fed has to consider actions that they can do to soften some of the distributional blows of a contractionary monetary policy so that when they are not even in a contractionary monetary period, even when they're in an expansionary monetary period, that their actions are also consistent with their rhetoric and ensuring that they are creating new wealth, providing mechanisms for people who have, as the author described, been locked out, now have access.
All that said, this is not the entire onus of the Fed, but rather, there needs to be fiscal policy from the government side, the federal government side also, to promote greater access to capital so that people can get into ownership of an asset. But one thing is for sure - the political constraints on the federal government are less so for the Federal Reserve. They can take more direct action without some of the political constraints that take place because of our partisan divide in America.
MARTIN: So we've asked you to tell us what you know. So now I'm going to ask you to tell us what you think. Like, what would help right now, from your perspective? - I mean, recognizing, as you've just told us, policy always involves tradeoffs. So inflation is still high. There's some evidence to suggest that it's slowing down a bit. But the, you know, Fed chair has made no secret of the fact that, you know, more rate hikes could be coming. If you were advising the Federal Reserve right now, what are things that you would advise to focus on to keep this very persistent, very high wealth gap in mind?
HAMILTON: Yeah, I mean, in addition to interest rates, the Federal Reserve has a great deal of sway on banking in general. They have direct mechanisms to regulate banks and to even set terms for how banks lend - engage in lending. So I would use some of that mechanism, some of that action step that they have in thinking about ways in which they can, even in a context of raising interest rates, ensure that capital, that finance and that terms of finance are being distributed in a way to promote greater access to low-income people and, you know, more racially inclusive policies so they can use that arm of how they regulate banks.
It's a mechanism that they haven't conventionally used. But I dare say that we've seen precedent as a result of this pandemic of the ways in which they can engage with banks in distributing money and resources and capital to the American people. So we need to think creatively. We need to move beyond just the blunt instrument of interest rate hikes or decreases.
MARTIN: And before we let you go, what about the Biden administration? Is there something that the administration could be doing? - even, as you pointed out, that the Fed is sort of designed to be insulated, to a degree, from kind of the momentary political and partisan pressures, but even recognizing, you know, President Biden - he's - there are various, obviously, political influences weighing on him as well. What do you - do you have some advice for him?
HAMILTON: The Biden administration, as they get tied up in this new legislative moment, which will tie their hands a little bit, I think, through executive action and making sure that the already trillions of dollars of money that's coming our way through the IRA and through some of the already financed federal programs, that they are administered in a way that is racially inclusive.
MARTIN: That's economist Darrick Hamilton. He's a professor of economics and urban policy at The New School in New York City. Professor Hamilton, thanks so much for sharing this expertise with us.
HAMILTON: Thank you very much. Transcript provided by NPR, Copyright NPR.