The Federal Reserve’s Reckoning on Racial Equity

The Federal Reserve Building in Washington, DC. 

Photo by Oscar Perry Abello

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The Federal Reserve’s Reckoning on Racial Equity

What the recent changes at the Federal Reserve mean for Black and Brown job-seekers, and how those changes are rooted as much in grassroots organizing as they are in macroeconomic theory.

Story by Oscar Perry Abello

Published on Nov 22, 2021

(EDITOR’S NOTE: This story has been updated to reflect President Biden’s renomination of Jerome Powell for another term as Fed Chair.)

Apryl Lewis is typically a shy person. But she loves talking about the Federal Reserve. Sometimes if she just feels talkative, she’ll wear one of her green t-shirts with bold white lettering in all caps saying things like “WHAT RECOVERY?” or “FULL EMPLOYMENT DEFENDERS.”

And she doesn’t mind when random strangers do sometimes come up to her to ask about it — right in Charlotte where she lives and works as a housing justice organizer at Action North Carolina, or in Washington, D.C., or Jackson Hole, Wyoming, on trips organized by the Fed Up Campaign, the group that gives out the t-shirts.

“I’ll say ‘thank you for asking about it, this is one of the ways we protest and provide information about the Federal Reserve,’” Lewis says. “I still have every green t-shirt we ever got. Still to this day when I want to have a conversation piece I just put on one of those shirts.”

Over the past decade, the Fed Up Campaign has organized Black, Brown and other historically marginalized people from around the country for protests, town halls and other gatherings targeting the Federal Reserve, one of the most powerful yet little understood institutions in the economy. They routinely hold events and protests in D.C. or Jackson Hole at the same time the Federal Reserve is holding meetings there or testifying in Congress, calling for “full employment, rising wages, and a Federal Reserve that works for working people.” Lewis began volunteering with the campaign in 2015.

Depending on who’s asking, Lewis might steer the conversation in a few different directions. She might talk about how Black unemployment is typically twice as high as white unemployment, so even if the overall unemployment rate is historically low, job growth still hasn’t reached everyone it needs to reach because a higher percentage of Black people are actually still looking for a job. Or she might talk about how one of the reasons you can’t find a job that pays you a living wage is because the Federal Reserve raised interest rates to a level that prevents that job from opening up. She might talk about how that living wage job could help you afford your rent, or buy your first home, if only that job existed.

It’s a big moment right now for the Federal Reserve. The White House has a chance to appoint three new members to the Fed’s governing body of seven, and just renominated Jerome Powell as Fed Chair. Whoever those choices turn out to be have the chance to shape economic policymaking for the next decade and beyond — a full term as Fed governor is 14 years. It will be the first time in decades that Democrats have appointed a majority of Fed Governors.

Lewis is one of a growing number of racial justice organizers and activists, many of them people of color or women, who want the Fed to be more cognizant of its impact on Black and Brown communities, and to be more representative of those communities in its leadership. They’re renewing what was once a notable strain of political organizing around the central banking system.

“I’m letting people know who is actually in charge of everything affecting us and who has the power,” Lewis says. “It’s a central bank led by people who are not fully representative of us. It has some more diversity now, but it’s still not where we need it.”

The Making of The Fed

Despite its aura of secrecy around how it makes decisions and reputation for conducting esoteric debates about inflation and economic growth, the Fed is also historically a product of political compromise and public debate.

The earliest drafts for what became the Fed were sketched out by six powerful and wealthy white men at an exclusive club on an island off the coast of Georgia in 1910. Their plan was a compromise. The country had already twice created a central bank in response to a financial crisis and later abolished it for fear of having too much power in one institution. So instead of just one central bank, the plan was to create a network of central banks across the country, each with its own regionally-appointed board of directors to oversee operations.

The six men were convened by a Republican senator, but after the 1912 elections their plan had to get through a White House and a Congress controlled by Democrats before it became law. Newly elected President Woodrow Wilson had campaigned on an anti-monopolist platform, but it was he who signed the Federal Reserve Act in 1913, creating the central banking system. Early drafts of the plan gave private bankers most of the power over who ran the system, but the final plan gave more power to the President and the Senate.

In this August 2017 photo, the group Fed Up holds a protest rally during a three-day meeting of central bankers in Jackson Hole, Wyoming.  (AP Photo/Martin Crutsinger)

In the 1970s, the Fed became part of a compromise brokered in response to an advocacy campaign championed by the recently widowed Coretta Scott King. Full employment was always a big piece of the civil rights movement — the occasion for her husband Martin Luther King Jr.’s “I Have a Dream” speech was the 1963 March on Washington for Jobs and Freedom.

“The struggle for economic empowerment was an integral part of every campaign of the civil rights movement, from Montgomery to Memphis,” Scott King said in a 1994 speech. “We always pressed for a greater share of jobs, employment training, and economic opportunities, even as we struggled against racial discrimination. And let us never forget that Martin Luther King, Jr. was assassinated at a labor union organizing campaign.”

Continuing the work, in 1974, Scott King co-founded the National Committee for Full Employment to advocate for a federal jobs guarantee. Their goal really was zero unemployment — anybody who wanted work could find work, and if you couldn’t find a job in the private sector, the federal government would employ you, like it did during the Great Depression era with the Works Progress Administration. It very nearly went into law as part of the Humphrey-Hawkins Act of 1978. Early drafts of the bill created a federal job guarantee office, established the federal government as “employer of last resort” and even granted citizens the right to sue the federal government if they could not find a job.

In the end, the watered-down Humphrey-Hawkins Act that passed Congress created a compromise — instead of requiring the President or Congress to pursue or guarantee full employment, it tasked the Federal Reserve with a “dual mandate” to promote both price stability and maximum employment.

“I hope somebody remembered that we did get a bill,” Scott King said in the 1994 speech. “But it wasn’t enforced, and it didn’t get implemented, and it was watered down.”

How the Fed Exacerbated Black Unemployment

The Fed’s dual mandate got watered down because of something called the Phillips Curve, named after the British economist A.W. Phillips, who first identified it in a paper published in 1958. Using data on the U.K. economy from 1861 to 1957, Phillips plotted a graph that showed lower unemployment associated with higher inflation, and higher unemployment associated with lower inflation.

By the late 1970s, U.S. economists, including those working at the Fed, were desperate to fight back against the chronically high inflation over the previous decade. The Phillips Curve led them to believe they needed to pull the economy into a recession for the sake of stabilizing prices.

And it did seem to work — inflation subsided in the 1980s and has remained consistently lower ever since. The Fed went on to operate on the belief it always needed to maintain a certain level of unemployment for the sake of keeping inflation at bay — generally somewhere around 5%. That approach by itself isn’t racist, but until recently the Fed only ever considered unemployment at the aggregate level for the whole economy — ignoring the fact that unemployment rates for Black and Brown people are consistently higher than for whites, a gap that grows during recessions.

“Through the entire financial crisis and recovery from the Great Recession, we never put a chart in front of the [Federal Reserve] Board of Governors with the Black-white unemployment rate — never,” says Claudia Sahm, an economist who worked at the Federal Reserve from 2007 to 2019. “You kinda know certain groups are always hit harder in a recession, but it’s different when you stare at a line. We didn’t do that, they never saw that, they only ever saw the national employment rate.”

As a result of the Fed’s “colorblind” approach to measuring unemployment, Black and Brown communities typically still faced recession-level unemployment rates by the time the Fed started to “pump the brakes” on economic growth for the sake of preventing inflation. Meanwhile, white communities reach unemployment rates even lower than the aggregate level, leaving everyone else behind.

Most economists still explain away racial disparities in unemployment by attributing it to factors inherent to Black people — lack of education, lack of skills, a general lack of something. It’s called “statistical discrimination,” and Andre Perry rails against it in his book about racism in economic policy, “Know Your Price.” For the sake of fighting inflation, Perry says, Black people and Black communities have had to live permanently with recession-level unemployment rates.

“Black people have always been the sacrificial lambs when it comes to monetary policy,” says Perry, a senior fellow at the Brookings Institution Metropolitan Policy Program. (Editor’s note: Perry is also a Next City board member.)

The Fed Finds Its Way Again

The Fed is showing signs that it’s starting to take seriously what Perry, Lewis and others on their side have been saying. And while the Fed Up Campaign has been rallying people of color, organized labor, housing justice activists and others publicly to call out the Fed for the hidden racism in its approach to unemployment, the Fed itself has been going through a significant internal reckoning with some of the same questions that activists continue to raise.

“The institution changed more I think in the ten years I was there than I would have ever expected,” Sahm says. “What you’re seeing over time is, slowly, the Fed bringing its maximum unemployment mandate so that it’s on par with its stable prices mandate.”

By August 2020, Fed Chair Jerome Powell delivered a speech called, “New Economic Challenges and the Fed’s Monetary Policy Review.” The speech summarized the Fed’s intellectual journey to create a new framework for monetary policy — how the Fed decides to set interest rates, which is the primary way it influences the economy.

The Federal Reserve in Denver. (Photo by Oscar Perry Abello)

Lowering interest rates is like stepping on the economy’s gas pedal, while raising interest rates is like stepping on the brakes. Lowering interest rates encourages households to take out loans to buy homes, cars, appliances or other major purchases. It also encourages businesses to take out loans to expand and potentially hire new workers. Raising interest rates discourages all the above. In theory, keeping interest rates too low for too long risks causing inflation, as demand starts to put pressure on prices to rise. In theory, raising interest rates too soon after a recession can slow down the recovery and discourage businesses from hiring millions of people they otherwise might.

For most of the decade leading up to August 2020, the Fed kept interest rates near zero. In some ways it showed the Fed’s limits — even with such low interest rates, the recovery was infamously slow and uneven. The Fed can lower rates to make borrowing cheap, but it can’t force people to take out loans or to hire more workers. The media eventually dubbed it “the jobless recovery.”

Job growth did eventually start to pick up, and by January 2020 the overall unemployment rate was down to 3.5%. But that didn’t lead to an increase in inflation.

“As the last expansion went on, the Fed stayed largely out of the way and what they saw was more and more people coming back into the labor force, but inflation didn’t take off,” Sahm says. “It was so clear that they were wrong about the relationship between inflation and low unemployment, and if they were wrong on that, those people could have come back sooner, and how much good would it have done if the labor market had been better, sooner.”

The Phillips Curve isn’t a curve any more. It’s flattened.

And the Fed noticed something else. Powell said in his August 2020 speech, “as the long expansion continued, the gains began to be shared more widely across society. The Black and Hispanic unemployment rates reached record lows, and the differentials between these rates and the white unemployment rate narrowed to their lowest levels on record.”

A Policy That Accounts for Structural Racism

A “strong labor market” — economist-speak for lower unemployment — means lots of benefits for workers. As unemployment gets lower, workers get more bargaining power as employers compete for fewer numbers of unemployed people.

At the Roosevelt Institute, a progressive think tank, economist Mike Konzcal explains that in a “tighter” labor market, the more workers with more experience and skills find higher-paying positions that are a better fit for them, which opens up their last job for other workers moving up from lower-paid positions. More employers, he also says, invest more in existing workers, hoping to get more out of them before having to go out and find someone new.

But those benefits don’t reach everyone at the same time. Black workers are vulnerable to the “last hired, first fired” phenomenon — even now after decades of anti-discrimination policies being in place. During periods of sustained economic growth, as white workers leave existing jobs to find better and better opportunities, eventually employers have fewer choices but to hire Black or Brown workers they’ve been ignoring or discounting. (And when those workers are the most recently hired, they’re often the first to be fired during a downturn.)

Meanwhile, Black-owned businesses are more likely than white employers to hire Black workers, but Black business owners still face more barriers to credit than white business owners — even if they have good credit scores. Disparities in access to credit slows the ability of Black-owned businesses to hire workers from their communities.

Racism in the economy means it takes longer for the positive effects of stronger labor markets to reach Black and Brown communities. As Konzcal and his colleagues point out, the lower overall unemployment gets, the smaller the Black-white unemployment gap gets, and when unemployment goes up the gap goes up — it’s the “last-hired, first-fired” effect on a line graph. The economy would have employed 28 million more people if officials used estimates of full employment that accounted for racism, sexism and other forms of discrimination in the economy, according to research from Konzcal and his colleagues at the Roosevelt Institute.

The Fed can’t fix all of the structural barriers that result in Black unemployment being chronically higher than white unemployment. But the Fed can say it is going to account for that reality and encourage job growth until that unemployment gap closes, instead of pumping the brakes on the economy right at the moment the gap starts to close.

Describing the Fed’s new approach to full employment, Powell said in his August 2020 speech, “With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

Vindication

The Fed’s changes to monetary policy subtly tilt the economic scales back toward workers, particularly workers of color — and the neighborhoods in cities where, as a result of racism, they are often concentrated.

“The Fed has always had this information, but they’ve never had the proper framing, they’ve never said let’s specifically take into account whether everybody is really at the unemployment levels they should be at,” Perry says. “I think it’s a good move, I applaud the advancement on this issue, and I would give credit to the many advocates who have been screaming out loud waiting for someone to hear that Black unemployment should be the bar for whether we have a healthy economy.”

“Through the entire financial crisis and recovery from the Great Recession, we never put a chart in front of the [Federal Reserve] Board of Governors with the Black-white unemployment rate — never,” says Claudia Sahm, an economist who worked at the Federal Reserve from 2007 to 2019. “You kinda know certain groups are always hit harder in a recession, but it’s different when you stare at a line.”

Photo by Oscar Perry Abello

A lot of economists and commentators are upset about the Fed’s new approach to monetary policy. They see overall unemployment currently below 5% and inflation rising — though not nearly to the levels it was in the 1970s — and they want the Fed to pump the brakes on the economy sooner rather than later.

“A lot of economists, observers, who look at what the Fed is doing now and think the Fed is asleep at the wheel when it comes to inflation,” Sahm says. “I can see why some of these commentators are so uncomfortable with what the Fed is doing because it’s so new to them.”

But the Fed has been pushing back, even Fed Chair Jerome Powell, who at a press conference in September 2021 where he was defending the Fed’s new approach, he said, “We look at a very broad range of metrics when we think about what maximum employment is, and one of the things we look at is unemployment rates and participation rates and wages for different demographic and age groups.”

In other words, the Fed no longer uses a colorblind approach to determining full employment. It’s also looking at more than just unemployment for different demographic and age groups — it’s looking at wage levels to see whether all demographic groups really are seeing the characteristic wage increases of an economy that is truly reaching its potential for full employment.

“If you want to think harder about full employment, you have to think harder about why aren’t we there, and that leads directly to racial inequity in the U.S. economy,” Sahm says.

Lewis can’t help but feel at least a little bit vindicated.

“Thanks to this campaign that we worked on we were able to clearly redefine some of the data that’s used when it’s determining full employment and who full employment is actually for,” says Lewis.

The Work Left To Do

The Fed is still far from a racial justice organization, Sahm says. What it’s doing now is simply what it should have been doing since it got a dual mandate from Congress.

“When you see this conversation now it’s almost like we skipped 40 years,” Sahm says.

But, Sahm continues, “Having worked at the Fed … there’s not a lot of diversity of background, diversity of viewpoints. So many of the staff coming out of many of the same universities, same training. Rowing all the same direction does have some benefits, but it creates blind spots.”

Activists agree, especially when it comes to the make-up of who works at the Fed or holds leadership roles at the Fed. .

A July 2021 report from the Fed Up Campaign found that the Fed’s senior leadership — members of the Fed’s board of governors and bank presidents — are 100% white and 83% white respectively. Among the regional Federal Reserve Bank Boards of Directors, which play a key role because they select each bank’s president, 66% are white and 56% identify as men.

With three seats to fill on the Federal Reserve’s Board of Governors over the next few months, the Biden-Harris Administration has the chance right now to dramatically shift those numbers at the central banking system’s highest level.

It’s a hot topic for Saqib Bhatti and his colleagues at the Action Center on Race and the Economy, where he is co-director. Bhatti says the research and advocacy shop has been talking more and more with organized labor, community organizing networks and Teen Vogue readers about the Fed and its latent potential to do more when it comes to supporting racial equity in the economy.

“The combination of the financial crisis a decade ago and now the pandemic and the Fed’s response to those crises made it very clear, if we want to have an impact on economic policy, we can’t ignore the Fed,” Bhatti says. “It’s one of the most powerful economic policymaking institutions in the world and we don’t spend enough time thinking about it.”

So far, Bhatti’s group has floated Lisa Cook and Sarah Bloom Raskin to fill two seats on the Federal Reserve’s Board of Governors. It opposed Powell’s re-appointment as chair, favoring Current Fed Governor Lael Brainard — the only Democratic appointee currently on the Federal Reserve Board of Governors.

Cook is one of the relatively few Black women with a doctorate in economics. She’s used ​​data on lynching and racial violence in the U.S. to study the impact of violence on innovation and economic growth, and also argues that excluding African Americans and women from the innovation process costs the U.S. economy almost $1 trillion per year. Bloom Raskin, currently a law professor at Duke University, served a previous term on the Fed’s Board of Governors under President Barack Obama, and also served as Deputy Secretary at the U.S. Department of the Treasury.

“The Fed could do a lot of things but isn’t when it comes to racial justice,” Bhatti says. “Meanwhile under Powell, it’s been endlessly creative when it comes to sending money to financial markets and corporations on Wall Street.”

Powell staying has some benefits to all sides. His background in private equity as opposed to academia is a comfort to many on Wall Street. Yet the changes to monetary policy that favor low-income workers and communities of color have occurred under his watch — although, as Sahm says, the seeds of those changes go much deeper among the Fed’s staff of 400 or so economists working for the Fed’s Board of Governors in Washington, D.C.

“The understanding of monetary policy at the Fed has evolved, and it’s great Powell got there,” Bhatti says. “But if it’s more broadly understood at the Fed then why keep him as chair just on the basis of this one thing?”

There’s also more that could be done legislatively to push the Fed into doing more when it comes to racial equity.

“In principle, change happens not at the Fed, change happens in Congress,” Sahm says. “The dual mandate, Congress passed it but the Fed did not implement it in my opinion. If you want them to do a specific thing, you have to write it down specifically. If you give them wiggle room, they’re going to wiggle off to the least controversial space.”

Legislation sponsored by House Financial Services Committee Chair Maxine Waters would make explicit the Fed’s goals to close racial gaps in unemployment, and add a similar goal to close the racial wealth gap.

“Maxine Waters did more than any other member of Congress I’ve seen to light a fire under the ass of the Fed about racial equity issues in the economy,” Sahm says.

Other legislative ideas floating around include expanding the Fed’s temporary emergency powers beyond just emergencies — powers that were on full display during the worst of the COVID-19 pandemic. Expanding those powers would give the Fed the ability to influence the economy by buying certain financial assets, including municipal bonds or any bonds financing clean energy. Experts say doing so would help drive more investment into public housing, public transit, parks and libraries, and the clean energy sector.

“There’s a lot that can be done within existing statutory power that the Fed has but actually we also see a need to enact more legislation to make the Fed more responsive to Black and Brown communities,” Bhatti says.

Opposition to such changes is fierce, with the bottomless pockets of Wall Street to back it up. But that didn’t stop Coretta Scott King.

“We’ve definitely looked back at her work around the Fed,” Bhatti says. “The vision around full employment has not yet been met by the dual mandate because we’ve been ignoring the racial piece of it. You don’t achieve racially equitable results if you don’t have the intentionality.”

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.

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