The Fed and the Racial Wealth Gap

Will a Fed racial equality mandate improve monetary policy?

BY JOHN MILLER | January/February 2022

This article is from Dollars & Sense: Real World Economics, available at

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President Biden ran on adding a mandate for “racial equity” to the Federal Reserve’s two current mandates. Before the Fed embraces a progressive theory of social-impact monetary policy, however, it seems to be doing some due diligence. A new staff report from the New York Fed shows how a central bank focus on racial equity could make the problem worse. ... If you are only focused on race gaps in the labor market, the paper finds, then easier money is modestly egalitarian. Yet the effect on wealth is much larger as lower rates push investors into equities seeking higher investment returns. After a bout of expansionary monetary policy, “The earnings gains of black households are dwarfed by the portfolio gains of white households.” One lesson from the paper is that the entire effort to racialize monetary policy is misguided. ... If the Fed keeps its eye on its economic mandates, every race will benefit.

The Fed’s ‘Racial Equality’ Dilemma,” The Editorial Board, Wall Street Journal, Feb. 11, 2021.

The Federal Reserve (the Fed) is certainly not the sole cause of racial inequality in the United States, and its policies won’t singlehandedly solve our country’s racial inequities. But the Fed sure could make things better for people of color and most working people by pushing the economy toward sustained full employment, which would allow all those looking for work to find jobs. Adopting the racial equity mandate proposed by the Biden campaign, which, according to the Biden-Harris campaign website, called for the Fed to “aggressively enhance its surveillance and targeting of persistent racial gaps in jobs, wages, and wealth” could help make that happen.

For the Wall Street Journal editors, the Biden proposal to add combatting racial inequality to the Fed’s mandate is so much “wokeism” run amuck. On top of that, in their estimation the proposal would be counterproductive, doing more to worsen racial wealth inequality than it would to improve the relative economic position of people of color.

The editors have a point. A Fed policy of “easy money” intended to reduce persistent racial equity gaps by injecting more money into the economy would lower interest rates, funneling money into the stock market and further enriching the wealthy.

Nonetheless that’s awfully rich coming from the editors. If they were genuinely concerned with the extreme concentration of wealth in the hands of the overwhelmingly white superrich, they would endorse efforts to increase equality—like taxing the wealthy and expanding pro-poor government programs—instead of railing against them.

Central Bankers Are Already Social Engineers

Still, most economists, much like the Wall Street Journal editors, insist that the Fed can’t do much to correct inequality. For instance, in June of this year economist Martin Wolf devoted his Financial Times column to the proposition that “Monetary policy is not the solution to inequality.” Even President Biden’s Treasury Secretary Janet Yellen, who supports the administration’s Build Back Better agenda, told Congress in July 2015 when she was chair of the Fed, that “there really isn’t anything directly the Federal Reserve can do to affect the structure of unemployment across groups.”

But let’s get one thing straight. The Fed, the central bank of the United States, has always practiced what the editors call “social-impact monetary policy.” Even without a racial equity mandate Fed policy was never race neutral or class neutral. Nor has the Fed done what’s best for all races or classes.

The Fed currently has a dual mandate to ensure price stability and to promote maximum employment. But historically the Fed has favored employers and investors by putting ensuring price stability before promoting maximum employment, and in that way helping to perpetuate inequality. When the economy nears full employment, workers gain bargaining power and push up wages. The Fed then tightens monetary policy by reducing the money supply and raising interest rates in the name of fighting inflation. That either slows economic growth or induces a recession. Rising unemployment rates keep wage gains in check, reduce employer’s labor costs, and restore their profits. Also, by favoring price stability over employment, Fed monetary policy protects the value of the returns of investors from being eroded by inflation.

The Fed has long acknowledged this pattern, if not the effect of its policies on inequality. In the 1950s, William McChesney Martin, the longest-serving chair of the Fed, famously described the Fed’s job as “removing the punch bowl just when the party was really warming up.” But taking the punch bowl away just as the party gets going means those at the back of the unemployment line, who have been disproportionally Black workers, never get a job. And with the punch bowl of easy money gone, an economic downturn soon follows.

In the last two decades the trade-off between inflation and unemployment rates has broken down, and as wages have stagnated, labor costs have risen more slowly. In response, the Fed has kept interest rates low for longer than in the past. In August 2020, the current chair of the Fed, Jerome Powell, announced a new operating procedure that embraced a “flexible” inflation target that averages 2% inflation. The new procedure allows the Fed to continue to push the economy toward higher employment even when the inflation rate rises above its 2% target. While not a mandate, which would require Congressional approval, the new procedure favors disadvantaged workers more so than previous Fed policy.

But less than a year later, U.S. inflation rates were 5% and reached 6.8% by November 2021. While hardly runaway inflation, those elevated inflation rates were enough to set off calls for the Fed to abandon its low interest rate policy, even at the risk of slowing the recovery. Higher prices have eroded some of the gains low-wage workers have made during the recovery. But a tighter monetary policy aimed at reducing inflation would not help to restore those gains. The 2021 Annual Economic Report of the Bank of International Settlements, which acts as an international bank for central banks, found that in advanced economies where inflation averaged less than 5%, lowering inflation rates did not reduce inequality. With U.S. inflation rates likely to fall below 5% early in 2022 and continue to decline, the Fed doesn’t need to abandon its employment mandate to fight inflation just as wage gains have picked up.

How Would a Racial Mandate Work?

The intent of adding a racial equity mandate is to push the Fed to adopt an easier monetary policy that would move the economy closer to sustained full employment, allowing those at the back of the unemployment line to find a job.

The Biden racial equity mandate, according to the Biden-Harris campaign website, would require “the Fed to regularly report on current data and trends in racial economic gaps—and what actions the Fed is taking through its monetary and regulatory policies to close these gaps.” For Narayana Kocherlakota, a former president of the Minneapolis Federal Reserve Bank, that’s a game changer. He told National Public Radio that “Anything the Fed has to pay attention to in its reports to Congress or the public immediately flow into decision-making.”

Instead of using the overall unemployment rate, the Fed would use Black unemployment rates to measure when it had fulfilled its employment mandate. Black unemployment rates historically have been about twice as high as white unemployment rates, and they have also taken longer to recover after an economic downturn. For instance, as Treasury Secretary Yellen has pointed out, during the Great Recession a little more than a decade ago, the white unemployment rate peaked at 9.2%, but the Black unemployment rate reached 16.8% and remained at double-digit levels for five years. Even in November 2021, when the official unemployment rate had fallen from its pandemic high to 4.2%, the Black unemployment rate was still 6.7%.

Relying on the findings in a recent report from the staff of the New York Federal Reserve Bank, the Wall Street Journal editors argue that easier monetary policy would reduce racial gaps in employment and income by only a modest amount. According to the report’s authors, after moving to an easier monetary policy by cutting interest rates by a full percentage point, the Black unemployment rate would fall just 0.2 percentage points more than the white unemployment rate, and the earnings of Black households would increase by only $97 more than that of white households in a year.

To the extent that a race-conscious monetary policy can bring about lower unemployment rates that are sustained over time, it could substantially reduce racial income gaps. A recent study conducted by economist Josh Biven of the Economic Policy Institute shows just how much a reduction in the overall unemployment rate would do to close racial income gaps. In 2019, the median Black worker was paid 32.2% less in hourly wages than the median white worker; the gap is up from 28.6% in 1973. Biven found that if the unemployment rate had averaged one percentage point less annually from 1973 to 2019, the median Black-white wage gap in 2019 would have been almost cut in half to 18.0%. If the unemployment rate had averaged two percentage points lower, a highly ambitious target, the racial income gap in 2019 would have been just 5.4%.

What to Do About Racial Wealth Inequality?

The New York Fed’s report that racial wealth gaps would widen substantially with easier money is disturbing, but hardly surprising. During the recovery from the pandemic, the Fed’s easy money policies pushed down interest rates in the hope of encouraging spending in the failing economy. But interest rates are the rate of return for buying bonds. With a lower rate of return, money moved out of the bonds market into the stock market. Stock prices shot up, benefitting the rich, and overwhelmingly white, owners of most stocks.

According to the Fed staff study, a one-percentage-point reduction in interest rates would add $25,000, or 25%, to the wealth of the typical white family, and just $5,000, or 9%, to the wealth of the typical Black family. Today the racial wealth gap has returned to levels not seen since the 1950s. If racial wealth inequality had held steady at its level in 1977, Black wealth would have been 18% of white wealth instead of its even lower 12% in 2019. Those grotesque levels of wealth inequality are what render a racial equity mandate ineffective at reducing wealth inequality. But imposing a tighter monetary policy to address racial wealth inequality would slow the economy, stymie job growth, inflict real pain on all those looking for work or for a better job, and hit Black households particularly hard.

The advocates of a race-conscious monetary policy never claimed that it would on its own close the racial economic gaps that have persisted throughout our economic history.

The antidote to worsening racial wealth inequality is not to abandon race-conscious easier monetary policies, but to add to them. To reduce the extreme concentration of wealth, the federal government needs to tax all capital gains as they are accumulated, or to tax wealth directly. In addition, we need more pro-poor government spending programs that would disproportionately favor people of color, and they need to be permanent. Progressives in Congress and the Biden administration have proposed many such measures, such as free universal preschool and making an expanded child tax credit permanent. The pandemic relief programs in 2020 made clear that those programs not only reduce poverty but also reduce racial inequities. The Supplemental Poverty Measure, which includes the support of government programs as well as market sources of income, fell 4.3 percentage points for Black households from 2019 to 2020, close to double the 2.4 percentage point drop for white households. When financed by making the wealthy pay their fair share of taxes and by lower interest-rate borrowing brought about by a racial equity mandate, a pro-poor program of large and sustained public investment would substantially reduce long-standing racial economic inequality.

But none of that would be to the liking of the Wall Street Journal editors. Not because of their faux concern about worsening racial wealth inequality or even their reflexive disdain for pro-poor government spending. But because the editors again and again have favored Fed policies that put the interests of the well-to-do in front of those of most everyone else, including people of color.

is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

Joe Biden for President: Official Campaign Website, “The Biden Plan To Build Back Better By Advocating Racial Equity Across the American Economy;” Martin Wolf, “Monetary Policy is Not the Solution to inequality,” Financial Times, June 29, 2021 (; Taylor Nicole Rogers, “Black Leaders urge action to match Janet Yellen’s words on race,” Financial Times, Dec. 28, 2020 (; Board of Governors of the Federal Reserve System, “Guide to Changes in the 2020 Statement on Long-run goals of Monetary Policy Strategy,” Aug. 27, 2020 (; Danielle Kurtzleben, “Biden Wants the Fed to Help Close Racial Economic Gaps. How Would that Work?”, National Public Radio, August 1, 2020 (; Alina K. Bartscher et al., “Monetary Policy and Racial Inequality,” Federal Reserve Bank of New York, June 2021 (; Josh Biven, “The Promise and limits of high-pressure labor markets for narrowing racial gaps,” Economic Policy Institute, August 24, 2021 (; Liana Fox and Kalee Burns, “The Supplemental Poverty Measure, 2020,”Census Bureau, Report P60-275, Sept. 14, 2021 (

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