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Aug. 19, 2020, 10:27 a.m. EDT

Changing the Federal Reserve’s mandate could provide a down payment on ending racial inequality

Monetary policy should be calibrated to give a hand to the most disadvantaged Americans

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By William M. Rodgers III

The unemployment rate for Blacks is roughly double the rate for whites, but the gap narrows as the economy is allowed to expand longer.

The job of slicing up the economic pie in the U.S. has traditionally fallen to Congress, with the Federal Reserve tasked with making sure there is enough to go around. But this could soon change.

Under proposals put forward by Democrats in Congress, the mandate of the Fed would be tweaked for the first time since 1977, when its objectives were made explicit: promote maximum employment, stable prices and moderate long-term interest rates. Under the new proposals, the central bank would gain an additional task of reducing racial inequality.

Also read: To close the racial wealth gap, put more Blacks in the seats of power

In short, the central bank could be handed the pie cutter and told to make sure everyone gets a fair share

If passed, the Federal Reserve Racial and Economic Equity Act would shift some of the responsibility for addressing systemic racial inequality away from Congress. Given that the nation’s politicians have failed to level the playing field to date, that may not be a bad thing.

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News: Moody’s says the racial wealth gap makes the U.S economy weaker

My work with economist Valerie Wilson finds that the economic position of Black Americans is equivalent to their relative position in 1979, with Black men earning on average 31% less than white men and Black women 19% less than white women.

When you factor in the incarcerated population, Black Americans are no better off than they were in 1950.

Also read: Black New Yorkers with a college degree earn $21,900 a year less than their white counterparts

As a former chief economist at the U.S. Department of Labor who has researched racial inequality, I believe that the proposed changes to the Federal Reserve’s mandate would improve the economic status of Black Americans and that the Fed can achieve this in three key ways.

1. Targeting Black unemployment

The main tool the Fed has in guiding the U.S. economy is through the setting of interest rates. Adjusting its benchmark interest rate changes the cost of borrowing for companies and consumers, which in turn can stimulate or subdue their spending. When the unemployment rate is extremely low — as it was prior to the pandemic — the Fed may increase interest rates. This puts a brake on private consumption and investment and protects against inflation.

The problem is that currently the Fed focuses on the national jobless rate, the same one reported every month in the news. This figure obscures the wide variation among different regions and demographic groups, not to mention that it ignores the growing share of Americans who are underemployed.

At present, the Fed uses the national unemployment rate to help guide its rate setting. But even during times of prosperity, the Black American jobless rate is roughly two times the white rate.

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