How the US Fed helped create America’s K-shaped economy

This divergence is both a feature and bug of tight monetary policy

- CLAUDIA SAHM

Dearer loans tend to slow the US economy from the bottom up.

(AP)

Federal Reserve Chair Jerome Powell agrees that there’s probably something to the claims of a K-shaped economy. But at last week’s press conference, he failed to note how the Fed has helped to create it—and the implications it has for monetary policy.

“Ifyou listen to the earnings calls or the reports of big, public, consumer-facing companies, many of them are saying that there’s a bifurcated economy there and that consumersat the lower end are strugglingand buying less and shifting to lower cost products,” Powell said last week. “But that at the top, people are spending at the higher income and wealth.”

With its restrictive interest rates in recent years, the Fed has contributed to this bifurcation. Specific demographic groupsare not targeted when setting rates. Themandateisfor maximum employment andstable prices forthe country asa whole. But raising or lowering rates creates differences across households.