The Federal Reserve is grappling with how it could play a larger role in tackling longstanding racial disparities in the U.S. economy, even as the COVID-19 pandemic reverses recent progress.
The pandemic has had a disproportionate impact on people of color, who have lost their jobs and are dying from the virus at a faster rate. It has also underscored existing wealth gaps in the U.S. economy that put them on shakier financial footing heading into the severe downturn brought on by the pandemic.
Fed leaders have spoken openly about those concerns this year, a focus welcomed by economists and policy experts who have continually pressed the central bank to acknowledge those wealth barriers. They also say they hope the Fed's worries will lead to concrete actions, given its role in steering the U.S. economy and regulating the banking system.
"This really does actually open the door for the Fed to possibly be the leading agent" in making the economy more equal, said Mayra Rodríguez Valladares, a banking industry consultant who started her career as a New York Fed analyst.
The Fed's focus on narrowing racial gaps could sharpen if Democrats sweep the 2020 elections. Former Democratic Vice President Joe Biden's platform calls on the Fed to "aggressively enhance" its monitoring of racial disparities in the economy and diversify the Fed's mostly white leadership. Democrats have also introduced legislation that would explicitly add the elimination of racial disparities to the Fed's mandates.
Fed officials have taken some steps to address those concerns. In August, the Fed overhauled its framework for raising interest rates to effectively prioritize achieving a "broad-based and inclusive" recovery over the Fed's key worry in the past: a hot job market pushing up inflation to unhealthy levels.
The change came after a series of community listening sessions the Fed held starting in 2019, as well as the actual performance of inflation after the 2007-09 financial crisis. Inflation stayed stubbornly below the Fed's 2% target for most of the recovery, a sign that the economy was not yet fully recovered for many Americans before the pandemic hit, said William Spriggs, chief economist at the AFL-CIO and a Howard University professor.
Spriggs — who wrote an open letter this summer on the economic profession's failures to account for racism in its models — credited the Fed for moving away from many economists' assumptions that full employment "doesn't include Black workers."
"I don't think they've hit the right model yet, but that recognition goes a long way," Spriggs said.
Diversity at the Fed
One key area that Fed officials have acknowledged needs improvement is ensuring the central bank looks more like the rest of America.
All five members of the Fed's Board of Governors, whose appointees are picked by the president, are white. The leaders of the Fed's 12 regional districts are mostly white, with two exceptions: Minneapolis Fed President Neel Kashkari, the son of Indian immigrants, and Atlanta Fed President Raphael Bostic, who became the first Black and first openly gay leader of a regional Fed bank.
Senior staff at the Fed also tend to be white, with roughly one in four coming from minority backgrounds in 2019, according to an annual report the Fed submitted to Congress. Sheila Clark, who leads the Fed's Office of Diversity and Inclusion, told lawmakers recently the Fed is committed to continuing to improve those figures. For example, the Fed has sent staff to teach and mentor students at Howard University, a historically Black institution in the nation's capital, and has stepped up outreach to colleges with high enrollment of students of color.
While a more diverse research staff is not a panacea, bringing in new perspectives could help the Fed better understand different groups' experiences and ultimately make policy more effective.
"We tend to make models and make assumptions off those models," said Mónica García-Pérez, a St. Cloud State University professor and president of the American Society of Hispanic Economists. "Diversity in the profession allows us to create new assumptions."
Experts see room for the Fed to use its regulatory functions to make the U.S. economy more equitable, particularly by strengthening the Community Reinvestment Act, or CRA. The CRA is a 1977 law aimed at ensuring banks are adequately serving low- and moderate-income areas.
Fed officials are considering an overhaul of the CRA, with Fed Governor Lael Brainard saying the law is "one of the most powerful tools we have for addressing systemic inequities in credit access for minority individuals and communities." Fed officials are taking comments on potential CRA changes until mid-February 2021.
The vast majority of banks receive "satisfactory" scores on CRA exams from their primary federal regulators, rather than the top score of "outstanding," according to an S&P Global Market Intelligence analysis.
Industry critics say that reflects the need for banking agencies to toughen CRA standards. Bank examiners should expect the institutions they oversee to make strong commitments to help underserved communities during the pandemic, suggested Josh Silver, a senior adviser at the National Community Reinvestment Coalition, which focuses on ending discrimination in lending.
He also suggested the Fed take a more active approach when considering bank mergers, including by making public hearings and commitments to improve local communities the "rule rather than the exception."
One shortcoming in the current CRA framework is that its enforcement mechanism is not meaningful until banks consider mergers or expansions, said Emma Coleman Jordan, a Georgetown University law professor. Poor CRA scores can be a factor that regulators use to deny banks' expansion applications.
"They don't get Community Reinvestment Act scrutiny — as weak as it is — until they apply for something," Jordan said.
The Fed could also choose to use its emergency lending powers to help people of color in a more effective manner, Jordan and other experts said.
Rep. Ayanna Pressley, D-Mass., and other Democrats have pushed the Fed to make its Municipal Liquidity Facility a more attractive financing option for state and local governments. Those entities are major employers of Black workers, and they have cut more than 1.2 million jobs this year.
The Fed's municipal facility offers loans of up to three years and charges above-market prices, often making the municipal bond market a cheaper alternative than Fed loans.
Fed officials have said they are open to making changes to the facility. But they have emphasized it was meant as a funding backstop to calm the stresses that hit the muni bond market this spring and that funding from Congress would be more effective than loans.
Officials have taken a more expansive view of the emergency lending powers that Congress granted them in section 13(3) of the Federal Reserve Act. During the 2007-09 crisis, Fed officials used those powers to help financial firms and avoid a deeper crisis, but the COVID-19 pandemic has led to the launch of facilities that now make loans to mid-sized businesses and local governments.
But the law allows the Fed to lend directly to individuals during a crisis, Jordan said, giving the Fed the power to launch a facility for individuals rather than relying on liquidity to "trickle down" from banks.
Fed officials were "given the power to provide relief in an emergency to individuals, and they just don't," she said.
That approach could represent a major operational challenge for the Fed, whose usual transaction counterparties are banks. But it would be an effective way to help those who are shut out of the banking system or are marginally banked, Jordan said.
Black unemployment rate
A policy brief this summer also suggested the Fed use the Black unemployment rate as its guidepost when it eventually raises interest rates. The brief was co-written by Janelle Jones, managing director for policy and research at the progressive group Groundwork Collaborative, and Jared Bernstein, a Biden economic adviser who was his chief economist in the White House.
Fed officials have expressed openness to those suggestions, but they have been skeptical of their ability to use their blunt interest-rate policy tool to target a single demographic. They have also questioned whether a single measure of the labor market would adequately gauge whether the economy is at its full potential.
The move would be a "revolutionary idea" that would show that the Fed takes seriously the country's longstanding unemployment gaps between Black and white workers, said Michelle Holder, an economics professor at the City University of New York's John Jay College.
But even if the Fed chooses not to adopt such a change, it "needs to keep talking about issues of Black unemployment" and how an equitable recovery benefits the whole U.S. economy, Holder said.
Asked about the issue in July, Fed Chairman Jerome Powell said labor market disparities are frequently discussed at the rate-setting Federal Open Market Committee and are a focus of Fed officials' speeches and reports to Congress.
"You'll see it everywhere, in all the things that we do," Powell said.
The Fed's regional districts at Minneapolis, Atlanta and Boston have also partnered on a series of webinars on racism and the U.S. economy. The webinars will include views that "you are not accustomed to hearing" in a Fed-affiliated forum, Bostic said in an Oct. 19 speech to the Securities Industry and Financial Markets Association, an industry trade group.
"Ultimately, that's the point," Bostic said. "We need to participate in a deeper, more creative reckoning with a history of racial injustice that continues to weaken the economy for all of us."