The Fed’s new plan entails keeping interest rates low for as long as it takes to employ as many people as possible, though it may take years before that policy begins to benefit the most financially vulnerable. It’s an acknowledgment that rate hikes in previous business cycles, intended to head off inflation, have caused some people to miss out on the benefits of economic growth. Disproportionately, those people have been minorities.
“The entire 1980s under [former Fed Chairman] Paul Volcker and his war on inflation, each and every month the Black unemployment rate was above 10 percent,” said William Spriggs, a professor of economics at Howard University and the AFL-CIO’s chief economist. “Black America was forced to live an entire decade in a depression.
“Black America was the easiest group of folks to make understand what it means when you never let the economy return to full employment,” he added.
The Fed is pledging not to raise interest rates until prices begin to rise more rapidly — allowing inflation to move slightly above its target of 2 percent. That will likely push unemployment lower than it otherwise would be able to go, giving chronically out-of-work Americans a crucial opportunity to rebuild a connection to the workforce.
But Democrats, including Waters and Sen. Elizabeth Warren (D-Mass.), want the central bank to pursue more aggressive policies that aim to close racial wage and employment gaps, including through its supervision of banks and community development initiatives.
Those lawmakers, with others like Sens. Kirsten Gillibrand of New York and Cory Booker of New Jersey, and Rep. Ayanna Pressley (D-Mass.), have introduced a bill that would require the Fed to pursue policies in a way that “minimizes and eliminates racial disparities in employment, wages, wealth, and access to affordable credit.”
Biden has also included in his platform a call for the Fed to be required to “aggressively target” such racial gaps, beyond its current congressional mandates of price stability and maximum employment.
Powell has bemoaned the tragedy of the pandemic, which thrust the country into a deep recession and put millions out of work just as the decadelong expansion was starting to boost wages and create employment opportunities for low-income people.
Atlanta Fed President Raphael Bostic, the first Black head of a regional Fed branch, has called systemic racism “a yoke that drags on the American economy.”
The Fed’s goals in its policy shift are broader than just employment; seeking modestly higher inflation would allow the central bank to raise rates higher down the road, giving it more room to later cut them — its standard stimulus response in the face of a downturn. It’s also aiming to avoid the fate of Japan, which for decades has struggled against deflation and sluggish growth.
Still, the pivot represents a yearslong evolution at the central bank, as 50-year-low unemployment never yielded problematic levels of inflation. Essentially, if the Fed is raising rates in anticipation of inflation that’s not actually coming, it’s merely slowing down job and wage gains.
“In December 2015, when the Fed started to raise rates, [Black unemployment] was 8.5 percent compared to 5 percent overall,” said Amanda Fischer, policy director at the Washington Center for Equitable Growth. “To call that a tight labor market is pretty stunning.”