central banks

Can the US Federal Reserve take on racial inequality?

Agence France-Presse, Agence France-Presse
Can the US Federal Reserve take on racial inequality?

A protester holds a Black Lives Matter sign during a demonstration against the shooting of Jacob Blake in Kenosha, Wisconsin, on August 26, 2020. - Outrage continued to spread after Kenosha, Wisconsin police shot Jacob Blake multiple times in the back point-blank in front of his children in the Midwestern city on August 23. As President Donald Trump vowed to send in federal forces, the NBA cancelled all three playoff games on August 26 after the Milwaukee Bucks -- whose home base is just to the north of Kenosha -- boycotted their game in protest at Blake's shooting. (Photo by KAMIL KRZACZYNSKI / AFP)

Democratic lawmakers want the US Federal Reserve to add a 'racial justice mission' to its so-called dual mandate, which currently requires a focus on price stability and maximum employment

Massive protests against racism have gripped the United States in recent months, and prompted many companies to take a hard look at their policies and try to redress inequalities in hiring.

So can the US central bank play a role in tackling the issue in the broader economy? 

Democratic lawmakers, inspired by the Black Lives Matter movement, have proposed a law to make it a requirement.

The Federal Reserve has limited tools to promote economic prosperity generally, and it is even more difficult to target racial issues specifically.

But “traditionally, the Fed is interested in what is happening in terms of inequality,” Lydia Boussour of Oxford Economics told Agence France-Presse.

Monetary policy can only “indirectly impact” inequalities, she said, as lower interest rates makes it cheaper to borrow, which stimulates investment and therefore hiring.

Democratic members of Congress want the Fed to add a “racial justice mission” to its so-called dual mandate, which currently requires a focus on price stability and maximum employment. 

“The Fed can use its existing authorities to reverse the serious racial gaps in our economy, including in our current recovery from the COVID-19 crisis – and our bill will require the Fed to do so,” Democratic Senator Elizabeth Warren in a statement.

“Systemic racism and inequality is not something that happens on its own. It is a result of specific policy choices and the Fed must take deliberate action to fix it.”

The push has an echo in history, since it was civil rights activist Coretta Scott King, widow of slain hero of the movement Martin Luther King, who in the 1970s pushed to require the central bank to focus on full employment and not just inflation.

Now 57 years after King’s famous “I have a dream” speech in Washington, the world’s largest economy is facing a sharp downturn amid the COVID-19 pandemic, which is hitting Black workers and families much harder.

‘Responsible for cutting the pie’

Representative Maxine Waters, chair of the powerful House Financial Services Committee, said the economic damage and other impacts of pandemic crisis “disproportionately affect communities of color.”

The Fed “must do everything it can to ensure these recovery is equitably shared,” said Waters, one of 12 women in the 435-member House.

African Americans have seen higher rates of infection, and suffered most in the massive wave of job losses.

Official data show the unemployment rate for Black workers surged to 16.8% in May from 5.8% in February, prior to the pandemic, and was still 14.6% by July.

In contrast, white unemployment peaked at 14.2% in April, and in July had recovered to just 9.2%.

Under the new proposal, “the central bank could be handed the pie cutter and told to make sure everyone gets a fair share,” said William Rodgers, professor at Rutgers University, former chief economist in the Labor Department. 

This law “would shift some of the responsibility for addressing systemic racial inequality away from Congress. Given that the nation’s politicians have failed to level the playing field to date, that may not be a bad thing,” he said, in a column on The Conversation website.

‘No real tools’

The Fed has not commented on the legislation – which is unlikely to become law – but Fed Chair Jerome Powell has repeatedly raised the issue of racial disparities in the US economy.

“Every market in every economy has longer run issues. And one of ours is just a disparate level of unemployment between Blacks and whites,” he said last month.

While the institution monitors the data closely, solving a problem that stretches back to the founding of the nation may be beyond the Fed’s ability.

“We don’t really have tools,” he said, noting that government spending, education, and healthcare policies are “much better” positioned to take action.

But Atlanta Federal Reserve Bank president Raphael Bostic said the Fed “can play an important role in helping to reduce racial inequities and bring about a more inclusive economy.”

Bostic, the sole African-American on the Fed’s key monetary policy committee, said in a column in June that “institutionalized racism constrains this country’s economic potential,” and the Fed can help by promoting a strong economy. 

Powell agreed, saying a strong job market was the best way to help underserved groups. But after the 2009 recession, it “took 8 years” for the economic recovery to benefit everyone. – Rappler.com

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