When Jay Powell convened the most recent meeting of Federal Reserve policymakers, his agenda included an unusual item for a central bank — the mass protests against racial injustice that followed the police killing last month of George Floyd in Minneapolis.
Mr Powell had prepared a public statement he wanted to run by Fed officials. They approved, and the Fed chairman read it at his news conference the next day. There was “no place at the Federal Reserve for racism”, he said, “and there should be no place for it in our society”.
His statement last week reflected a big change at the US central bank: its growing focus in recent years on income inequality and the role racism has played in perpetuating the problem. This year those concerns have been heightened by the disproportionate impact of the coronavirus pandemic on minority communities and their economic prospects — and then by the Black Lives Matter demonstrations.
One result has been a marked increase in the emotional content of commentary by Fed officials. Neel Kashkari, a former Goldman Sachs banker and George W Bush administration veteran who heads the regional Fed in Minneapolis, said he found it “shocking” that the officers who killed Floyd “never blinked” and “never hesitated”. He said on Twitter: “It indicates institutional racism that is actively taught and reinforced.”
The economic implications of this social framework were spelt out by the first African-American to lead a regional Fed, Raphael Bostic, president of the central bank’s Atlanta arm. In a note issued after last week’s meeting of the Federal Open Market Committee, he described “systemic racism” as a “yoke that drags on the American economy”.
“This country has both a moral and economic imperative to end these unjust and destructive practices,” Mr Bostic said. “It is time for this cycle to stop.”
Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth, says those comments are the product of a multiyear evolution in central bank thinking that began under Janet Yellen and has continued under her successor, Mr Powell.
“The Fed is an institution that is conservative — little c — and they don’t step out into the light very often, but when they do it reflects a lot of time spent before that trying to think about their message,” Ms Sahm said.
The central bank’s heightened sensitivity reinforces the dovish tilt of monetary policy. Fed officials, who are now expecting to keep US interest rates close to zero until at least the end of 2022, have grown more comfortable with the idea that even with low unemployment, there could be plenty of slack in the labour market, and no significant inflationary pressures. Keeping rates lower for longer, in turn, would particularly help African-American communities with historically higher shares of joblessness.
“Going into this crisis and going forward we’re just more prepared to say the labour market can run hotter than we thought and it has these enormous benefits and it doesn’t spur inflation,” Mary Daly, the president of the Federal Reserve Bank of San Francisco, told reporters this week.
This shift means it will be a “long time” before the Fed prematurely tightens in a downturn, said William Spriggs, who recently caught the attention of US policymakers by lamenting that his fellow economists had treated race for too long as an “exogenous variable”, with the assumption that “African Americans are inferior until proven otherwise”.
“In the past, the Fed didn’t have to see inflation, they just had to imagine there was inflation [before raising rates],” said Mr Spriggs, an economics professor at Howard University and chief economist at the AFL-CIO union federation. “I think they have learned their lesson.”
Ms Sahm said the Fed had for decades “stymied the progress” of minority groups by never reaching full employment. “There’s a very credible case that even in the late 1990s the Fed has never achieved the principle of full employment, which is that everybody who wants a job, gets a job, and a good job, not the crappy jobs we have now,” she said.
Some economists — including Janelle Jones of Groundwork Collaborative, a progressive think-tank, and Jared Bernstein, who worked in Barack Obama’s administration — have suggested the Fed could go as far as targeting the black unemployment rate in its monetary policy. But while that is unlikely, Fed officials are embracing the idea of taking entrenched inequalities into account as they make their decisions.
“Understanding these disparities is vitally important to us,” Mr Kashkari said. “If we allow the labour market to heal and not pre-emptively tap the brakes, it turns out that’s actually good for groups that are marginally attached to the labour force, those with less education, and minority groups.”
The Fed could also come under increasing pressure to use its regulatory tools to encourage banks to provide credit in minority communities. Emanuel Cleaver, a Democratic congressman from Missouri, on Wednesday quizzed Mr Powell on whether the Fed could address an “obvious lack of inclusion” in finance. The Fed chairman said: “We are definitely recommitting ourselves to enforcement of fair lending laws.”
Mr Kashkari told the Financial Times that the issue of lending in underserved communities was “challenging” in that it involved asking banks “to give just as many loans to everybody” even if there were large differences in income, and the ability to pay them back. He proposed focusing on education.
“Economic justice starts with education,” he said. “The underlying disease here at the root of this starts with massive education disparities, then people have fewer job opportunities, and less access to credit.”
Speaking to Congress, Mr Powell said the Fed — where minorities account for 25 per cent of PhD economists and 23 per cent of executive and senior level officers — had tried to make diversity a “very high priority”. But he suggested the central bank could do the most good by maintaining its dovish interest-rate policy for as long as needed.
“Probably the most important thing we can do is try to get back as quickly as possible to the labour market we had for the last couple of years,” he said. “There’s nothing like a tight labour market for the lives in low and moderate-income communities.”