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The Federal Reserve’s complicated relationship with race

Members of the Fed Up Coalition stand outside a hearing room before Federal Reserve Chair Janet Yellen appears before the House Financial Services Committee on Capitol Hill on Feb.  10, 2016.  NICHOLAS KAMMNICHOLAS KAMM/AFP/Getty Images
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Janet Yellen may be the only leader of the Federal Reserve who has ever justified central bank stimulus by highlighting the plight of black workers. Yet lately, she has been attacked for not doing enough to help them.

Yellen appeared before combative lawmakers earlier this month to deliver her semiannual testimony on Capitol Hill. It was her first round of hearings since the central bank took the historic -- and controversial -- step of raising its benchmark interest rate last year for the first time since the Great Recession. The decision was driven by solid gains in the job market and was supposed to signal the Fed’s confidence in the recovery. But Yellen was quickly reminded that progress has been uneven.

First up was Rep. Nydia Velazquez of New York, who bluntly asked: “Do you consider 8.8 percent unemployment rate among African-Americans today too high?”

Next was Rep. David Scott of Georgia:

"Yeah, we can crow about 4.5 unemployment rate. Do you know what the unemployment rate is for African-American men between the ages of 18 and 37? It's 36.5 percent unemployment. And in some communities, like Chicago and Baltimore, Atlanta, Houston -- any of these big cities, it's hovering at 50 percent. Now, when you have this devastating situation, there is nobody else -- there is no other agency that has the mandate to deal with it as the Fed."

On and on it went, with so many minority lawmakers pressing Yellen on the issue that Texas Rep. Al Green felt compelled to state that it was not a coordinated attack.

"I want you to know that there has not been some sort of conspiracy among Congressional Black Caucus members to bring up this issue of lack of employment; although, I think we do talk about it among ourselves quite regularly,” he said. “And not enough talk takes place among those who have the power to influence public policy.”

Janet Yellen is learning the importance of politics in economics

Does the Fed factor in the experience of black workers when crafting policy? It's complicated. Congress has charged the Fed with two chief responsibilities: to keep inflation stable and to maximize employment. The central bank does that primarily by adjusting its benchmark interest rate. When inflation is rising and the job market overheating, the Fed raises rates to rein in the economy. When inflation is low and unemployment is rising, the Fed lowers rates to stimulate the economy.

It’s a pretty blunt instrument, even when it works perfectly. Responding to lawmakers’ concerns, Yellen argued that the Fed sets policy that steers the ship of economy, but it has little ability to lower the jobless rate among specific minority groups. In fact, she said, crafting programs that improve education and opportunity for disadvantaged workers is Congress’ job.

"It’s important to recognize that our powers, which involve setting interest rates, affecting financial conditions, are not targeted and can't be targeted at the experience of particular groups. I think it always has been true and continues to be true that when the labor market improves, the experience of all groups does improve."

Though the Fed does not calibrate interest rates to jobless rates among black workers, minority unemployment is often not even part of the conversation.

Former Minneapolis Fed President Narayana Kocherlakota searched through the transcripts of the central bank’s meetings in 2010 and found no references to the jobless rate of African Americans. (Though in one meeting, Fed Gov. Dan Tarullo references high unemployment among minorities.) A search of the terms “black” and “African American” in the transcripts from 2008 and 2009 as well -- as waves of foreclosures ripped through minority neighborhoods -- also found no direct mention of the impact the recession was having on these workers or their communities.

“You just get into certain patterns of conversation … and other important elements get lost as a result of that,” Kocherlakota said in an interview. “We get pretty granular in our conversations. They would be further enriched by getting granular along this dimension.”

Skepticism about the Fed's focus on the needs of black Americans took center stage during the subprime housing crisis that disproportionately affected so many of them. After the crisis, it became clear that Fed regulators had placed relatively little priority on their consumer protection responsibilities, which were shifted to the newly created Consumer Financial Protection Bureau as part of the 2010 Dodd-Frank Wall Street reform act.

“They had the ability to close the floodgates on these kinds of predatory loans,” said John Taylor, head of the National Community Reinvestment Coalition. “It was one of the most irresponsible inactions of any agency in recent history.”

More recently, the Fed has been at the center of a campaign by progressive activists who want the central bank to hold off on any more rate increases until the economy is stronger. The group, known as Fed Up and led by the Center for Popular Democracy, has pushed for legislation that would require the central bank to target a 4 percent minority unemployment rate. During Yellen's congressional testimony, demonstrators filled the hearing room and lined the hallway outside.

Meet the ordinary people who are mobilizing around monetary policy

Yellen tackled the problem of African American unemployment in her very first public address as Fed chief. Speaking in Chicago, she recounted recounted the experiences of individual workers to illustrate why the economy still needed the Fed’s support.

The past six years have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work; to feel your marriage and other relationships strained and broken by financial difficulties. And yet many of those who have suffered the most find the will to keep trying.  

It was an unconventional approach for the typically staid Fed, where speeches are typically filled with footnotes, not personal anecdotes. Yellen never directly mentioned the workers’ race, though she pointed out -- as she has several times before -- that black workers were among the groups for whom the recovery has been particularly slow.

As part of sweeping reforms mandated by Congress, the Fed established an internal diversity office in 2011. Its latest annual report shows that minorities make up 73 percent of service workers and 87 percent of administrative support workers at the central bank’s Washington-based board of governors. Minorities make up about half of the mid-level managers, but they account for just 21 percent of top management.

There have only been three black Fed governors in the central bank’s 100-year history, and no presidents of its regional branches have been African American.

“The heart of our dialogue and our conversations is the notion that it’s important to have different kind of perspectives on our economy,” said Kocherlakota, who is half Asian Indian and grew up in Canada. “I just don’t think you can be saying you are doing that successfully if you have that kind of track record on diversity.”

This post has been updated to include Fed Gov. Dan Tarullo's comments in 2010 and to show there have been three black central bank governors, not two.

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