The Fed's (not so) new role: Champion of the working class

The central bank has been quietly working to reduce income inequality

Janet Yellen
(Image credit: (Illustration by Lauren Hansen | Images courtesy Chip Somodevilla/Getty Images, Angel Zayas/Demotix/Corbis))

Earlier this month, Federal Reserve Chair Janet Yellen publicly picked up the income inequality banner that President Obama's administration has largely dropped in the face of multiple global crises, including the situation in Ukraine, the Ebola pandemic, and the rise of the terror group ISIS.

Obama, in a speech last December, had called inequality the "defining challenge of our time" and committed his administration's full attention to fighting it for the remainder of his term. But Vladimir Putin, Abu Bakr al-Baghdadi, and the Ebola virus had other plans, and what once looked like the administration's roadmap for policy action through 2016 was largely crumpled up and tossed aside.

However, in a speech at the Federal Reserve Bank of Boston, Yellen reminded people who haven't been paying attention that there is still at least one major institution still treating economic inequality as a front-burner issue.

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"The extent of and continuing increase in inequality in the United States greatly concern me," Yellen said. "The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression.

"By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then."

In the most widely quoted segment of the speech, Yellen said, "It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."

Her remarks were received by certain sectors of the media as somehow shocking. The suggestion was that the Federal Reserve has suddenly turned its attention to the vast and widening income gap.

The truth is much different. The Fed, long associated with Wall Street and major money center banks, has actually been engaged on the income inequality issue for some time now — longer, in fact, than the Obama administration.

Yellen's predecessor, Ben Bernanke, addressed the issue as early as 2007, when George W. Bush was still in office. In 2010, he warned of the creation of "two societies" in the U.S.

However, while Bernanke was focused on problems like inequality of opportunity in education leading to economic inequality, Yellen has been attacking the problem in a venue closer to the Fed's stomping grounds: unemployment levels and wage growth.

Yellen has spent much of the last year arguing against fellow economists who believe that the U.S. economy is, for various structural reasons, already at or close to its optimal rate of employment.

Yellen has consistently fought back against the idea that everyone who wants a job in post-Great Recession America has already come back to the labor market, arguing instead that the Fed ought to keep interest rates lower for longer in order to encourage business investment and hiring. That's also, by the way, a recipe for increased worker wages, because as available workers become scarcer, wages will inevitably rise.

While it may not be what anybody would have expected a few years ago, these days the Federal Reserve might be the best friend the unemployed and low-income worker has.

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