Fed's Brainard: Middle-Class Wealth Squeeze Threatens Economy

The wealth of middle-class families still has not recovered from the 2007 to 2009 economic crisis, with a lagging rebound in home equity and slow wage growth continuing to widen inequality through most of last year, Fed Governor Lael Brainard said on Friday in a snapshot of soon-to-be-released Fed data.

Brainard, in a broad discussion of the middle class's economic prospects, said the Fed is increasingly concerned about the economic impact if middle-income households continue to struggle in their ability to build wealth, finance homes and educations, and even stay current with their bills.

Families in the 40th to 70th percentiles held wealth of around $340,000 at the end of 2018, based on a new Fed study whose results Brainard discussed at a Fed research conference in Washington. This was below the levels before the crisis and 13 times less than the average $4.5 million held by the top 10 percent.

Even as wages rose last year, a 2018 Fed survey whose results are to be released in coming weeks found that a third of families earning from $40,000 to as much as $99,000 would struggle to meet an unexpected bill of $400, either borrowing the money or selling something or not paying it at all.

"A large percentage of our respondents...find it difficult to meet what may seem like a relatively manageable expense," she said. "The fragility of households is not just at the lower income level."

"The discrepancy between slow growth in income and wealth, on the one hand, and rising costs of housing, healthcare, and education, on the other, may be making it more difficult for middle-income families to achieve middle-class financial security," Brainard said. Over time "the shifting of wealth and income to the top of the distribution and away from the middle could pose challenges to the health and resilience of our economy."

Ahead of the 2020 presidential race, the prospects of the middle class have fueled debate about issues like the high level of student debt and the cost and availability of health insurance.

While that is all beyond the Fed's authority, as are questions of taxation and issues involving income distribution, Brainard said the Fed still needs to understand dynamics that could, for example, slow consumption.

"There is a palpable sense that the opportunity to reach the middle class and remain in it is receding for many middle-income households," she said, noting recent Fed surveys that found 60 percent of middle-income families do not have enough savings to cover three months of expenses, leaving them financially vulnerable to a layoff or other economic shock.