Yet in a recent paper, we argued the Fed should take on another task: delivering more racial equity into the labor market by, as we put it, “targeting not the overall unemployment rate, but the Black rate.” What does this imply, how would it help, and is it a reasonable ask of the independent central bank?
First, some critical background information. Since we’ve been tracking black unemployment starting in 1972, that rate is consistently about twice that of both the white rate (by about 2.2 to 1) and the overall rate (by about 1.9 to 1).
The Fed uses its policy tools to meet its “dual mandate”: targeting the lowest unemployment rate consistent with stable inflation, which economists call the “natural rate of unemployment.” Right now, its estimate of that rate is about 4 percent.
But because black unemployment is two times the overall rate, targeting 4 percent for the overall economy means targeting 8 percent for blacks. As we wrote in our paper: “While we do not at all discount the Fed’s dual mandate and its role in setting and ‘anchoring’ inflationary expectations, we do not accept that this role must consign people of color to permanently slack labor markets.”
Historical estimates of the natural rate reveal that black unemployment has never fallen below those estimates The white rate, conversely, has been below the rate generally considered to mean full employment 58 percent of the time. In other words, using conventional metrics, the labor market faced by blacks is permanently slack. Recessionary conditions are the norm there.
Economists have typically argued that such disparities are due to the lower levels of educational attainment by black workers. But economist Valerie Wilson has shown that racial gaps persist across education groups. For generations, black workers have known this pushback to be false. Especially given events of recent weeks, it should be no surprise that racial discrimination plays a determinant role in this outcome, as research by the Fed has shown.
Because the Fed’s monetary policy partially sets the unemployment rate, it must be drafted to correct this persistent economic injustice. But operationally, how can it do so while maintaining its political independence and achieving its dual mandate?
In fact, what we’re proposing is handily within its scope and simply broadens the Fed’s mandate to make it more racially inclusive.
First, it should keep doing what it was doing before the pandemic. Under Powell’s leadership, the Fed’s policy moves were not guided by targeting upwardly biased estimates of the “natural rate.” Unemployment stayed well below that rate for three years, and inflation didn’t speed up at all. Recognizing this fact enabled Powell and company to be “data driven,” meaning they would let the jobless rate fall as far as it could, as long as inflation stayed cool, which it did.
This took the overall jobless rate down to 3.5 percent in February of this year and the black rate down to a record low of 5.4 percent last August. Before the crisis, the labor market was so tight that median earnings were growing faster for black workers than whites. Powell and other Fed officials consistently touted these very dynamics, underscoring the extent to which a tight labor market disproportionately lifted workers of color.
The problem is that blacks and other people of color cannot count on future Feds to help them the way Powell’s Fed did before the crisis. There are no rules enforcing Fed officials to “mind the (racial) gap,” and a different regime could easily drift away from a data-driven commitment to truly full employment and back to targeting too-high “natural rates” with little regard to the impact on racial outcomes.
To preclude this possibility, we propose adding language to the Federal Reserve Act, Section 2B: Appearances Before and Reports to the Congress. This law requires the Fed chair to both appear before Congress and submit a report that “present plans of the [Fed] … with respect to the conduct of monetary policy” covering “developments” in all the key macroeconomic variables, including jobs, incomes, prices and more.
We propose that Congress add language requiring the chair to report on the extent of racial employment and wage gaps, and what the central bank is doing to reduce them (to be clear, we’re referring to all racial gaps, not just those of blacks). The chair should be required to report on these activities in his or her spoken and written testimony.
Note that our suggestion requires the Fed to report on actions it is taking to reduce these gaps. The language is far from neutral. It is not just asking the chair to tell us about the gaps; it requires him or her to make closing them a part of their mandate. Interest rate policy is paramount in this regard, but so is internal research on the causes of the gaps, and other, less well-known Fed activities such as the promotion of financial literacy, tracking economic stability of vulnerable families and access to affordable capital, including housing, for disinvested communities.
We again stress that these additions do not challenge the Fed’s mandate for full employment at low, stable inflation. To the contrary, they finally expand the full-employment part of the mandate to reach a broad group of working people who have long been left behind based not on any economic rationale but on the legacy of systemic racism.