The Federal Reserve’s Reckoning on Racial Equity

Apryl Lewis is typically a shy person. But she loves talking about the Federal Reserve. Sometimes if she just feels talkative, she’ll wear one of her green t-shirts with bold white lettering in all caps saying things like “WHAT RECOVERY?” or “FULL EMPLOYMENT DEFENDERS.”

And she doesn’t mind when random strangers do sometimes come up to her to ask about it — right in Charlotte where she lives and works as a housing justice organizer at Action North Carolina, or in Washington, D.C., or Jackson Hole, Wyoming, on trips organized by the Fed Up Campaign, the group that gives out the t-shirts.

“I’ll say ‘thank you for asking about it, this is one of the ways we protest and provide information about the Federal Reserve,’” Lewis says. “I still have every green t-shirt we ever got. Still to this day when I want to have a conversation piece I just put on one of those shirts.”

Over the past decade, the Fed Up Campaign has organized Black, Brown and other historically marginalized people from around the country for protests, town halls and other gatherings targeting the Federal Reserve, one of the most powerful yet little understood institutions in the economy. They routinely hold events and protests in D.C. or Jackson Hole at the same time the Federal Reserve is holding meetings there or testifying in Congress, calling for “full employment, rising wages, and a Federal Reserve that works for working people.” Lewis began volunteering with the campaign in 2015.

Depending on who’s asking, Lewis might steer the conversation in a few different directions. She might talk about how Black unemployment is typically twice as high as white unemployment, so even if the overall unemployment rate is historically low, job growth still hasn’t reached everyone it needs to reach because a higher percentage of Black people are actually still looking for a job. Or she might talk about how one of the reasons you can’t find a job that pays you a living wage is because the Federal Reserve raised interest rates to a level that prevents that job from opening up. She might talk about how that living wage job could help you afford your rent, or buy your first home, if only that job existed.

It’s a big moment right now for the Federal Reserve. The White House has a chance to appoint three new members to the Fed’s governing body of seven, as well as deciding whether to renew Jerome Powell as chair or designate another board member to the top job at the Fed. Whoever those choices turn out to be have the chance to shape economic policymaking for the next decade and beyond — a full term as Fed governor is 14 years.

Lewis is one of a growing number of racial justice organizers and activists, many of them people of color or women, who want the Fed to be more cognizant of its impact on Black and Brown communities, and to be more representative of those communities in its leadership. They’re renewing what was once a notable strain of political organizing around the central banking system.

“I’m letting people know who is actually in charge of everything affecting us and who has the power,” Lewis says. “It’s a central bank led by people who are not fully representative of us. It has some more diversity now, but it’s still not where we need it.”

The Making of The Fed

Despite its aura of secrecy around how it makes decisions and reputation for conducting esoteric debates about inflation and economic growth, the Fed is also historically a product of political compromise and public debate.

The earliest drafts for what became the Fed were sketched out by six powerful and wealthy white men at an exclusive club on an island off the coast of Georgia in 1910. Their plan was a compromise. The country had already twice created a central bank in response to a financial crisis and later abolished it for fear of having too much power in one institution. So instead of just one central bank, the plan was to create a network of central banks across the country, each with its own regionally-appointed board of directors to oversee operations.

The six men were convened by a Republican senator, but after the 1912 elections their plan had to get through a White House and a Congress controlled by Democrats before it became law. Newly elected President Woodrow Wilson had campaigned on an anti-monopolist platform, but it was he who signed the Federal Reserve Act in 1913, creating the central banking system. Early drafts of the plan gave private bankers most of the power over who ran the system, but the final plan gave more power to the President and the Senate.

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In this August 2017 photo, the group Fed Up holds a protest rally during a three-day meeting of central bankers in Jackson Hole, Wyoming.  (AP Photo/Martin Crutsinger)

In the 1970s, the Fed became part of a compromise brokered in response to an advocacy campaign championed by the recently widowed Coretta Scott King. Full employment was always a big piece of the civil rights movement — the occasion for her husband Martin Luther King Jr.’s “I Have a Dream” speech was the 1963 March on Washington for Jobs and Freedom.

“The struggle for economic empowerment was an integral part of every campaign of the civil rights movement, from Montgomery to Memphis,” Scott King said in a 1994 speech. “We always pressed for a greater share of jobs, employment training, and economic opportunities, even as we struggled against racial discrimination. And let us never forget that Martin Luther King, Jr. was assassinated at a labor union organizing campaign.”

Continuing the work, in 1974, Scott King co-founded the National Committee for Full Employment to advocate for a federal jobs guarantee. Their goal really was zero unemployment — anybody who wanted work could find work, and if you couldn’t find a job in the private sector, the federal government would employ you, like it did during the Great Depression era with the Works Progress Administration. It very nearly went into law as part of the Humphrey-Hawkins Act of 1978. Early drafts of the bill created a federal job guarantee office, established the federal government as “employer of last resort” and even granted citizens the right to sue the federal government if they could not find a job.

In the end, the watered-down Humphrey-Hawkins Act that passed Congress created a compromise — instead of requiring the President or Congress to pursue or guarantee full employment, it tasked the Federal Reserve with a “dual mandate” to promote both price stability and maximum employment.

“I hope somebody remembered that we did get a bill,” Scott King said in the 1994 speech. “But it wasn’t enforced, and it didn’t get implemented, and it was watered down.”

How the Fed Exacerbated Black Unemployment

The Fed’s dual mandate got watered down because of something called the Phillips Curve, named after the British economist A.W. Phillips, who first identified it in a paper published in 1958. Using data on the U.K. economy from 1861 to 1957, Phillips plotted a graph that showed lower unemployment associated with higher inflation, and higher unemployment associated with lower inflation.

By the late 1970s, U.S. economists, including those working at the Fed, were desperate to fight back against the chronically high inflation over the previous decade. The Phillips Curve led them to believe they needed to pull the economy into a recession for the sake of stabilizing prices.

And it did seem to work — inflation subsided in the 1980s and has remained consistently lower ever since. The Fed went on to operate on the belief it always needed to maintain a certain level of unemployment for the sake of keeping inflation at bay — generally somewhere around 5%. That approach by itself isn’t racist, but until recently the Fed only ever considered unemployment at the aggregate level for the whole economy — ignoring the fact that unemployment rates for Black and Brown people are consistently higher than for whites, a gap that grows during recessions.

“Through the entire financial crisis and recovery from the Great Recession, we never put a chart in front of the [Federal Reserve] Board of Governors with the Black-white unemployment rate — never,” says Claudia Sahm, an economist who worked at the Federal Reserve from 2007 to 2019. “You kinda know certain groups are always hit harder in a recession, but it’s different when you stare at a line. We didn’t do that, they never saw that, they only ever saw the national employment rate.”

As a result of the Fed’s “colorblind” approach to measuring unemployment, Black and Brown communities typically still faced recession-level unemployment rates by the time the Fed started to “pump the brakes” on economic growth for the sake of preventing inflation. Meanwhile, white communities reach unemployment rates even lower than the aggregate level, leaving everyone else behind.

Most economists still explain away racial disparities in unemployment by attributing it to factors inherent to Black people — lack of education, lack of skills, a general lack of something. It’s called “statistical discrimination,” and Andre Perry rails against it in his book about racism in economic policy, “Know Your Price.” For the sake of fighting inflation, Perry says, Black people and Black communities have had to live permanently with recession-level unemployment rates.

“Black people have always been the sacrificial lambs when it comes to monetary policy,” says Perry, a senior fellow at the Brookings Institution Metropolitan Policy Program. (Editor’s note: Perry is also a Next City board member.)

The Fed Finds Its Way Again

The Fed is showing signs that it’s starting to take seriously what Perry, Lewis and others on their side have been saying. And while the Fed Up Campaign has been rallying people of color, organized labor, housing justice activists and others publicly to call out the Fed for the hidden racism in its approach to unemployment, the Fed itself has been going through a significant internal reckoning with some of the same questions that activists continue to raise.

“The institution changed more I think in the ten years I was there than I would have ever expected,” Sahm says. “What you’re seeing over time is, slowly, the Fed bringing its maximum unemployment mandate so that it’s on par with its stable prices mandate.”

By August 2020, Fed Chair Jerome Powell delivered a speech called, “New Economic Challenges and the Fed’s Monetary Policy Review.” The speech summarized the Fed’s intellectual journey to create a new framework for monetary policy — how the Fed decides to set interest rates, which is the primary way it influences the economy.

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The Federal Reserve in Denver. (Photo by Oscar Perry Abello)

Lowering interest rates is like stepping on the economy’s gas pedal, while raising interest rates is like stepping on the brakes. Lowering interest rates encourages households to take out loans to buy homes, cars, appliances or other major purchases. It also encourages businesses to take out loans to expand and potentially hire new workers. Raising interest rates discourages all the above. In theory, keeping interest rates too low for too long risks causing inflation, as demand starts to put pressure on prices to rise. In theory, raising interest rates too soon after a recession can slow down the recovery and discourage businesses from hiring millions of people they otherwise might.

For most of the decade leading up to August 2020, the Fed kept interest rates near zero. In some ways it showed the Fed’s limits — even with such low interest rates, the recovery was infamously slow and uneven. The Fed can lower rates to make borrowing cheap, but it can’t force people to take out loans or to hire more workers. The media eventually dubbed it “the jobless recovery.”

Job growth did eventually start to pick up, and by January 2020 the overall unemployment rate was down to 3.5%. But that didn’t lead to an increase in inflation.

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