Is Fed Responsible for Reducing Inequality?

Democrats in Congress have introduced a bill that would cement the Federal Reserve’s role in fighting economic inequality.

The Federal Reserve Racial and Economic Equity Act would amend the Federal Reserve Act to mandate that the U.S. central bank specifically work to decrease and eliminate gaps in employment, wages, wealth, and access to credit. It would also require the central bank to report on how it’s working to decrease racial disparities in its biannual reports to Congress and in the Fed chair’s accompanying testimony.

Although the bill has little chance of passing while the Senate is controlled by Republicans, its introduction shows that momentum is building to get the country’s century-old central bank to more specifically focus on creating an economy that is equal for all Americans. A November win that gave Democrats control of the White House and both chambers of Congress could change the calculus.

“Building on the great work of civil rights leader Coretta Scott King and others who led the way for the adoption of the Fed’s full-employment mandate, the Federal Reserve Racial and Economic Equity Act creates a new racial justice mission at the Fed to eliminate racial and economic disparities in all of its work,” Representative Maxine Waters said in a statement Wednesday.

The bill was introduced this week by Waters, chair of the House Financial Services Committee, and Senators Elizabeth Warren and Kirsten Gillibrand and was signed on by 17 other Democrats. The Biden campaign called for a similar proposal last week.

Economists Jared Bernstein and Janelle Jones have called on the Fed to target the Black unemployment rate when it makes policy decisions, in order to narrow the gap between White and Black unemployment. The difference between the rates has been persistently high, with the Black rate often more than double the White one. Black families also have one-tenth the wealth of White families, indicating systemic problems in the economy that continue to hamper upward mobility and opportunity for millions of Americans.

Fed Chair Jerome Powell said in May that the Fed’s policies do not exacerbate inequality. He said last week that the central bank doesn’t have the tools to address “disparate distributional outcomes” and indicated that fiscal policies may be better suited to address these problems in the economy. He has, however, said that the Fed has learned that it can run the economy hotter than thought without sparking unwanted inflation, and as a result the benefits of a tight labor market can be extended to poorer and minority communities.

The Federal Reserve Racial and Economic Equity Act also instructs the Fed to enforce fair lending laws and implement the Community Reinvestment Act (CRA) of 1977, a key piece of civil-rights legislation designed to address discriminatory lending practices. In its bank supervisory role, the Fed already oversees lenders for CRA compliance.

The Office of the Comptroller of the Currency (OCC), another regulator with oversight of the CRA, finalized a rule in May making significant changes that were criticized by banks and community groups. The Fed is moving ahead with its own proposal to update the legislation.

Banking regulation can have an impact on inequality. A report Tuesday by the New York Fed highlighted weak relationships between banks and Black-owned business for handicapping the extent that the government’s Paycheck Protection Program reached such firms.

—With assistance from Matthew Boesler

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