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How the Fed Just Reduced Inequality

NEW YORK – The US Federal Reserve has finally done it, raising interest rates for the first time in almost a decade. The ramifications for interest-rate spreads, emerging-market equities, and housing demand, among much else, are the subject of widespread debate. But, as markets learn to cope with a less accommodative monetary policy, there could be an important silver lining, which most people have ignored.

Income and wealth inequality in the United States has grown steadily since the global financial crisis erupted in 2008, but monetary-policy normalization could mark the beginning of the end of this trend. Indeed, it should serve to accelerate its reversal.

Consider a few dismal statistics reflecting the current state of affairs. Real (inflation-adjusted) median household income in the US is about the same as in 1979. A recent study by the Pew Research Center noted that Americans earned 4% less income in 2014 than they did in 2000, and for the first time in more than 40 years, middle-class Americans no longer constitute a majority of the population.

America’s 20 wealthiest people now own more wealth than the bottom half of the entire population The wealth gap between America’s high-income group and everyone else has never been more extreme; rich households account for more than one in five of the entire US population. Strikingly, one hour north of Wall Street, in Bridgeport, Connecticut, the Gini coefficient – a standard measurement of income distribution and inequality – is worse than in Zimbabwe.