October 17, 2014 / 2:40 PM / 5 years ago

UPDATE 3-Citing U.S. values, Yellen says troubled by rise in economic inequality

* Fed Chair delivers broad social critique of rich-poor gulf

* Points to stagnant living standards for the majority

* Inequality of opportunity a rare topic for Fed speeches

By Jonathan Spicer

BOSTON, Oct 17 (Reuters) - Federal Reserve Chair Janet Yellen on Friday said the growth of economic inequality in the United States was not in keeping with American values and she hinted at a range of steps that could address it.

With global stock markets rebounding after frenzied selling, Yellen did not comment on the volatility or on monetary policy. Instead, she ventured into a social critique rare for a U.S. central banker, focusing on the widening gulf between rich and poor.

“The extent of and continuing increase in inequality in the United States greatly concern me,” Yellen told a conference sponsored by the Boston branch of the central bank.

“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.”

The topic of income disparity has been addressed by Fed chairs before. But Yellen in her data-heavy speech went far down a prescriptive road, saying public spending can narrow gaps in education quality and help level the economic playing field.

“The United States is one of the few advanced economies in which public education spending is often lower for students in lower-income households than for students in higher-income households,” she said. Yellen said relying on property taxes to pay for schools exacerbated inequality because more affluent areas could afford to spend more.

Jared Bernstein, a former top economic adviser to Vice President Joe Biden, said Yellen was “expanding the scope of the Fed in really positive ways.”

“She is clearly trying to connect the micro to the macro,” he said. “She wants to know how her work at 40,000 feet is playing out on the ground.”

Income disparity has risen since the 2007-2009 recession. A Fed study published last month showed that from 2010 to 2013, income growth was concentrated among the richest 3 percent of U.S. families, who accounted for some 30 percent of all income.

NUDGING LAWMAKERS

Yellen, who has given major speeches on inequality for some two decades and who toured a hard-hit neighborhood of Boston on Thursday, said rebounding house prices have restored much wealth to those at the bottom.

But she cited several troubling trends, including the high cost of higher education and a slowdown in business formation that she said could hamper economic mobility. She also analyzed the role large inheritances play in “the fairly limited intergenerational mobility.”

By some estimates, she said, “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.”

Josh Bivens, research director for the left-leaning Economic Policy Institute, called Yellen’s speech “a pretty deep dive into some pretty specific policy issues,” and unusual terrain for a Fed chair.

Yellen, who did not take questions, said she aimed to provide a factual basis for further discussion and she sat in the audience to hear research on race and economic inequality.

Among the issues the Fed is debating is whether the country’s long-term growth potential has declined, and what might increase it.

“It may be,” said Bivens, “that even the bread and butter job of Fed chair is made harder by the rise of inequality and they are trying to alert people to that.” (Reporting by Jonathan Spicer; Additional reporting by Howard Schneider in Washington; Editing by Tim Ahmann and Chizu Nomiyama)

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