WASHINGTON – Increasing inequality in income and wealth, including the widening gulf between the fortunes of people in urban and rural areas, threatens to limit U.S. economic growth, a Federal Reserve official warned Tuesday.
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"Much of the gains in employment, income and wealth since the end of the recession, and more broadly over the past few decades, have accrued to workers and families in larger cities," Fed governor Lael Brainard said, citing data to be released Wednesday in the central bank's latest Survey of Consumer Finances.
Since some workers and families find it difficult to move, this concentration of economic opportunities in larger cities could hurt "the well-being of these households and, potentially, the growth capacity of the economy as a whole," she said at a central bank conference on employment disparities in Washington.
More broadly, rising inequality reduces the long-run productive potential of the economy, she said, given its implications for consumer spending.
"Some research suggests that widening income and wealth inequality may damp consumer spending in the aggregate, as the wealthiest households are likely to save a much larger proportion of any additional income they earn relative to households in lower income groups that are likely to spend a higher proportion on goods and services," according to Ms. Brainard.
The top 1% of U.S. households reaped 24% of the nation's income in 2015, up from 17% in 1988, Ms. Brainard said, citing the survey.
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The share of wealth held by the top 1% rose to 39% in 2016, from 30% in 1989, she said.
The survey found persistent racial and ethnic differences in income and wealth, she said. The average income for white families in 2015 was about $123,000 a year, compared with $54,000 for black families and $57,000 for Hispanic families.
On a geographic basis, the average annual income for families in metro areas was about $25,000 higher than for families in nonmetro areas, and the average wealth holdings for families in metro areas exceeded average wealth for families in nonmetro areas by nearly $500,000 -- gaps that have more than doubled over the past three decades, Ms. Brainard said.
She noted, however, that while the geographic differences in average family income and wealth have grown, there has been little change in the medians -- or points at which half are higher and half are lower -- because in larger metro areas income and wealth increasingly have gone to wealthier families.
Ms. Brainard said the opioid epidemic appears to be particularly acute in smaller cities and rural areas. Factors behind the trend "may be related to the drop in labor demand: The despair related to diminished prospects of a stable and quality job may lead to substance abuse and related health or mortality concerns," she said.
Ms. Brainard didn't comment directly on the path of interest rates. Earlier this month, Ms. Brainard said the Fed should be cautious about raising short-term interest rates further until policy makers are confident of overcoming the "persistent failure" to reach their 2% inflation target.
The Fed last week left its benchmark short-term rate unchanged in a range between 1% and 1.25%, while officials indicated they expect to lift it before year's end.
Central bankers have long looked to a theory known as the Phillips curve which holds that falling unemployment pushes up inflation, requiring tighter credit to keep price pressures in check.
Fed officials are puzzled because, contrary to what the Phillips curve would predict, inflation has remained weak despite solid, if moderate, economic growth and low unemployment, which was at 4.4% in August. The Fed's preferred annual inflation gauge, excluding volatile food and energy categories, was 1.4% in July, down from 1.9% in January.
Ms. Brainard has voiced skepticism about the theory in the past, and she said Tuesday that "the traditional Phillips curve relationship is flatter than in the past, which means that price inflation is likely to be less informative regarding labor-market tightness than it was previously."
Write to Harriet Torry at email@example.com
(END) Dow Jones Newswires
September 26, 2017 14:08 ET (18:08 GMT)