The Washington PostDemocracy Dies in Darkness

How the Fed is trying to fill in the gaps of monetary policy

Federal Reserve Chair Janet Yellen tours a work training facility Thursday in Chelsea, Mass. She spoke with community leaders and residents of the economically hard-hit area. REUTERS/Dominick Reuter

When Federal Reserve Chair Janet Yellen visits the hardscrabble suburb of Chelsea, Mass., today, she will encounter a litany of problems that even the world’s most powerful financial institution cannot solve.

A quarter of the roughly 35,000 residents in the city just 10 minutes outside of Boston live in poverty. Community groups estimate that there may be as many as 10,000 additional people living there who are undocumented. The median household income is $43,919 — one-third lower than the state average. Only 14 percent of the population has a college degree.

The nation’s broader economic recovery has struggled to reach many working-class cities like Chelsea, despite historically low interest rates and the trillions of dollars the Fed has pumped into the economy. Indeed, the central bank’s actions have come under fire for exacerbating inequality as Wall Street quickly regained ground after the financial crisis, while hiring has only recently picked up.

But the Fed in recent years has made a concerted effort to incorporate Main Street concerns into their considerations of macroeconomic policy. On Thursday, Yellen will meet with nonprofits and community developers in Chelsea that have received funding through an initiative at the Boston Fed to address some of the economy’s most intractable problems — from long-term unemployment to access to credit — on the ground level.

“When you think about maximum employment, monetary policy can deal with the cyclical," Boston Fed President Eric S. Rosengren said in an interview Thursday. "If we were able to change the mindset in some of these cities, the employment picture in these cities would clearly be better.”

In Chelsea, Yellen will tour a program called Connect, which focuses on financial security. The program includes support groups for those with credit problems to veterans returning to the workforce, individual financial counseling and job skills training. About a third of participants do not have a high school diploma.

The three-year-old program seems to be gaining traction where monetary policy cannot. Ann Houston, executive director of the Neighborhood Developers, one of the organizations involved in the project, said those in the program see a $400 median increase in monthly net income. The median increase in credit score is 35 points.

“Increasingly, there’s this recognition that monetary policy is sort of a blunt instrument,” said David Erickson, director of the Center for Community Development at the San Francisco Fed, which has compiled extensive research on programs and places that have successfully reduced poverty. “In that case, you need a little bit more of a surgical tool, and that’s where community development comes in.”

Now, the Neighborhood Developers, along with about 30 other community groups, is using a $225,000, four-year grant organized through the Boston Fed to turn Chelsea’s toughest neighborhood around. The money is part of nearly $2 million awarded to cities across Massachusetts through the Boston Fed’s Working Cities Challenge with funding from outside donors.

The Shurtleff-Bellingham neighborhood makes up only a third of Chelsea’s population but accounts for 60 percent of crime, Houston said. Many homeowners were devastated by the foreclosure crisis and remain underwater on their mortgages. Community groups are betting that a comprehensive program that targets everything from rebuilding parks to personal financial support can make a difference. The goal is to reduce poverty there by 30 percent over the next decade and lower the turnover of students in the public schools.

Will the effort work? Social change — just like monetary policy — can operate with long and variable lags. Rosengren said the Boston Fed has been focusing on the issue for years and said its efforts understand and ensure that low- and moderate-income households benefit from the recovery will be ongoing. Yellen’s visit Thursday is just one step in merging Main Street with macroeconomics.

“What I hope she understands is that all of the decisions she makes have daily impact on people’s lives,” Houston said. “The people in this city are incredibly intelligent, hardworking, ambitious people facing lots of challenges. … Working together, we can actually make progress on these complex problems.”