Tags: Kocherlakota | Fed | policy | blacks

Blacks Feel Greater Effects of Fed Policy Than Broader Population

Blacks Feel Greater Effects of Fed Policy Than Broader Population

(Dreamstime)

Friday, 19 August 2016 11:34 AM

The U.S. Federal Reserve appears to be paying more attention to how its policies affect black Americans. This is a wise move, because blacks stand to gain a lot more than others from the Fed’s efforts to support economic growth.

The minutes of the Fed’s July policy-making meeting noted that officials had discussed unemployment rates and other measures of labor utilization for specific groups, including black Americans. It’s a subject worthy of attention: The black unemployment rate has been about 1.9 times the overall rate for more than 40 years.

What matters, though, is that the ratio between the two is much more constant than the difference. This means that -- even though the reasons for the long-term unemployment multiple are almost certainly beyond the reach of monetary policy -- the Fed’s choices can have a very different effect on black Americans than on the economy as a whole.

Imagine we’re in the midst of a severe recession. In deciding how aggressively to respond by lowering interest rates or buying assets, Fed officials must weigh the risk of unduly high inflation against the benefit of reducing unemployment. That benefit will be much greater for blacks, because recessions hit them about 1.9 times harder than others. At the same time, any policy that reduces the overall unemployment rate by one percentage point is a lot more beneficial for blacks, because it reduces their unemployment rate by nearly two percentage points.

The differential impact also matters now, as the Fed contemplates removing stimulus. With the central bank running out of tools to fight adverse economic shocks, many (including myself) have argued that it should raise rates slowly (if at all) to ensure that the economy is as resilient as possible. The need for caution is even more important for blacks, because recessions are so much more harmful for them.

By keeping interest rates low, the Fed is learning more about how far the unemployment rate can fall without causing undue inflation. This, too, can provide an outsized benefit for black Americans. Fed officials now think that they can safely shoot for a long-term unemployment rate of 4.8 percent -- about 0.8 percentage point lower than what they were targeting just three years ago. If they’re right, that reduction in the overall long-term unemployment rate translates into a 1.5-percentage-point improvement in the long-term unemployment rate for blacks.

The Fed rightly aims to pursue policies that are best for the economy as a whole. But I don’t believe that it will be seen as truly representative of all Americans unless it understands the differential impact of its policy choices on key demographic subgroups. It’s good to see from the minutes that the central bank is engaged in doing so.

 

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NarayanaKocherlakota
The U.S. Federal Reserve appears to be paying more attention to how its policies affect black Americans. This is a wise move, because blacks stand to gain a lot more than others from the Fed's efforts to support economic growth.The minutes of the Fed's July policy-making...
Kocherlakota, Fed, policy, blacks
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2016-34-19
Friday, 19 August 2016 11:34 AM
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