Fed’s push for ‘equity’ in society troubling

“The very first requirement in a hospital (is) that it should do the sick no harm.”

— Florence Nightingale

When the Federal Reserve was created in 1913, long before it aspired to be a fourth branch of government, its sufficient mission was to preserve the currency as a store of value: Price stability facilitates economic dynamism by giving economic actors a degree of certainty. In 1978, Congress encouraged institutional imperialism in the Fed by mandating that its policies should promote “maximum employment.” Ben Bernanke, the Fed chair from 2006 to 2014, construed this as a single capacious mandate for “promoting a healthy economy.” If so, the mandate excludes nothing.

Now, it seems, the Fed feels an irresistible itch to participate in every important government policy endeavor. The Fed — and some other central banks and international financial institutions — seems disposed to weigh “climate risk” in its decisions. Which implies that climate change poses a knowable near-term risk to the financial system. This is, to say no more, implausible.

In 2020, Joe Biden said the Fed should “aggressively target persistent racial gaps in jobs, wages and wealth.” If so, the Fed’s newest mandate is Washington’s word du jour, “equity.” This word implies, without defining, a social outcome different than — and superior to — the equality affirmed in the Declaration of Independence and the Constitution’s guarantee of equal protection of the laws.

The Fed’s economists, who had better be polymaths, must now plunge monetary policy and financial regulation into the political and philosophical challenges of pursuing social justice. First, however, they should read the Federal Reserve Bank of New York’s report “Monetary Policy and Racial Inequality.” If racial equity means less racial inequality in incomes and wealth, the Fed faces a conundrum: The monetary policy it thinks the nation needs now and for the foreseeable future — the Fed did not foresee 2008 in 2007, or the economy’s current strength four months ago — is harmful.

The Fed indicates that, until at least 2023, interest rates will remain near zero. (This is, in Fed-speak, “accommodative monetary policy.”)

Low rates stimulate the economy, drawing marginal workers into the labor market, and a tight labor market pushes up wages. But low rates also cause money to flow into assets such as stocks and houses in search of higher yields. But “the median Black household has no stock holdings, nor owns a house,” so “accommodative” policy “bypasses the majority of Black households.”

Over a five-year period, this policy causes the Black unemployment rate to fall by about 0.2 percentage points more than the white unemployment rate, but the policy increases stock prices by as much as 5% and house prices by 2%. And if it increases inflation, this disproportionately burdens low-income groups that devote larger portions of their incomes to consumption.

In 2019, the median wealth of white households was $184,390, and $20,730 for Black households. This ninefold wealth disparity dramatically exceeds the 1.7 times larger income disparity favoring whites.

The New York Fed’s report says that although “the distributional effects of monetary policy” are “outside central banks’ formal mandates, central bankers are increasingly discussing distributional issues.” When they are not discussing climate risks, and much else. Including, one hopes, what nurse Nightingale knew.