Income inequality is the notion that most of a nation’s wealth is held by a small percentage of the people in the income upper class. While inequality is inevitable on some level, central banks and governments around the world have been fighting its rise over the last ten years. In response to the Great Recession, unconventional monetary policy - namely quantitative easing (QE) - pushed asset prices to record highs, which began the endless inequality debate.
Quantitative easing is different from traditional central banking policy. In the past, the Federal Reserve was tasked with buying or selling government bonds. Buying bonds injects money into the economy, and selling bonds takes money out of the economy. In this way, the Fed is able to control the supply of money. The more money that is injected into the economy, the lower the cost of money (interest rates). Therefore, low-interest rates should lead to economic growth.
Instead of pumping money into the economy via the purchase of government bonds, QE is the buying of mortgage-backed securities (MBS) and Treasury notes. In response to the financial crisis, the Federal Reserve conducted three rounds of QE, which saw the Fed's balance sheet swell to $4.5 trillion. This money was funneled into the economy through the capital markets, which resulted in higher corporate debt, which was used for acquisitions and stock buybacks, both of which helped to push stock prices higher.
QE: Failure or Success?
The consensus is that QE was a success. In 2008, the financial system was on the brink of collapse. Without a means of funding, the injection of money by the Fed staved off a complete breakdown of the banking system. The systemic nature of the banking crisis saw similar programs conducted by the Bank of England, the European Central Bank (ECB), and the Bank of Japan (BOJ).
Critics of the QE program didn't necessarily disagree with the undertaking, but more the size and the length. With close to $5 trillion in assets and a decade-long period of low-interest rates, the U.S. equity market soared to all-time highs. However, the economy didn't match the exuberance; growth remained below 3%, inflation below 2%, and wages stagnated. While overall wealth increased, it did not benefit the lower-middle class.
Swift action by central banks pulled the U.S. economy out of the hole faster than many had expected. However, it did create unintended consequences.
Some believe the Federal Reserve contributed to the plight of income inequality with QE, saying it widened the income gap. As the stock market soared, wages stagnated, and with cheap money on the table, the only people that could take advantage were wealthy.
In other words, QE: monetary policy for the rich. (See also: How Monetary Policy Impacts Income Inequality)