It would be the first major change to the Fed’s mandate since 1977 and would significantly alter the central bank’s focus. The Fed’s current mandate from Congress is to keep prices stable and maximize the number of Americans with jobs.
While the legislation is not expected to pass Congress while Republicans control the Senate, it signals a growing consensus among Democrats that the Fed has played a role in deepening inequality and needs to be part of the solution to close gaps in employment and pay.
Presumptive Democratic presidential nominee Joe Biden recently released a similar proposal calling on the Fed to “aggressively enhance” its monitoring and targeting of “persistent racial gaps in jobs, wages, and wealth.” This latest bill in Congress goes a step further by explicitly requiring the Fed to work to close the gaps.
The legislation was written by Sen. Elizabeth Warren (D-Mass.) on the Senate Banking Committee, Sen. Kirsten Gillibrand (D-N.Y.) and Rep. Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee. Warren and Gillibrand both ran in the 2020 Democratic presidential primary before dropping out and backing Biden. The bill is co-sponsored by 18 other Democrats, including former presidential candidates Sens. Bernie Sanders (I-Vt.) and Cory Booker (D-N.J.).
“The Federal Reserve Racial and Economic Equity Act creates a new racial justice mission at the Fed to eliminate racial and economic disparities in all of its work," said Waters in a statement.
The legislation also requires the Fed chair to discuss disparities in income, wealth and employment, as well as what the Fed is doing to reduce and eliminate those disparities when testifying before Congress.
The Black unemployment rate has been about double the White unemployment rate for decades, and the coronavirus pandemic and recession have hit Black and Hispanic neighborhoods far harder than those of Whites.
There’s also a gaping divide in how much wealth Black families have, compared with White families. Wealth takes into account income, savings, homeownership, stock and bond ownership, and other assets. As of 2016, the most recent year for which data is available, the typical White household had more than 11 times the net worth of a Black household. The wealth gap remains as large as it was the late 1960s.
Critics of the proposal say the Fed already has clear goals to help every American and that the central bank’s tool kit is too limited to address long-standing inequalities in society. The Fed’s main policy action is to set interest rates, which makes it cheaper or more expensive to borrow money to buy a home, purchase a car or start a business.
“Isn’t this the job of Congress and, quite frankly, all of us?” tweeted Constance Hunter, chief economist at KPMG. “To put this on the Fed seems to set them up for failure unless the entire rest of the system is organized to help achieve this goal.”
But Warren and Waters say the Fed can do more to reduce inequalities. For example, economists like Biden adviser Jared Bernstein and Janelle Jones have argued that the central bank has raised interest rates too quickly in the past, hurting the job prospects of Black and Hispanic workers, who are often the last to get hired.
“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," Warren said in a statement.
Raphael Bostic, president of the Atlanta Fed and the only African American among the 17 members of the central bank’s top leadership, said the nation has a “moral and economic imperative to end racism," and the Fed “can play an important role” in addressing racism and inequality.
But Bostic also said that the Fed can only do so much and Congress and other institutions have a big role to play as well.
“This is a big issue. It’s been an issue for a long time. It’s an all-hands situation. We’re going to need every one of those hands to participate if we want to make progress in creating better conditions for black workers,” Bostic said in a July interview at an event hosted by progressive advocacy group Groundwork Collaborative.
Fed Chair Jerome H. Powell has spoken often about the nation’s inequalities, especially how the deep recession caused by the novel coronavirus is affecting low-income Black and Hispanic women the most. He has also overseen a pronounced shift at the Fed to worry less about inflation and focus more on getting the highest employment possible, especially for minorities, the disabled and the formerly incarcerated, groups that are normally the last to benefit from a hot economy.
But Powell has said repeatedly that the Fed doesn’t have sufficient tools to address inequality. He has urged Congress to take the lead role in closing long-standing gaps.
“We don’t really have tools that can address distributional disparate outcomes as well as fiscal policy [can],” Powell said last week at a news conference. He added that Congress is generally “much better” suited to fixing education, health care and other problems.