The Federal Reserve’s more inclusive approach to stewarding the US economy is undergoing a test as inflation rips through household budgets.
Central bank chair Jay Powell said the US labour market conditions were “consistent with maximum employment” when the Fed signalled it would start to raise interest rates in March. President Joe Biden expressed similar sentiments after a strong US jobs report on Friday, declaring that “America is back to work”.
But sharp declines in joblessness since the start of the pandemic have been unevenly distributed. While the US unemployment rate was 4 per cent last month, it was 6.9 per cent among black Americans — a reminder of historic economic disparities around the country.
Some economists and progressive activists are urging the Fed to proceed carefully as it reins in stimulus programmes and begins to tighten the money supply.
“The Fed is currently in this conundrum where they are still sort of keeping their long-term focus on the goal of employment while responding to very, very loud voices around inflation,” said Benjamin Dulchin, who directs a campaign that lobbies the Fed on behalf of people of colour for the Center for Popular Democracy.
The Fed in 2020 adopted a new strategy for monetary policy that was more tolerant of temporary rises of inflation. The central bank also reframed its position on maximum employment to embrace a “broad-based and inclusive” goal that was attuned to economic inequality in the US.
The central bank now faces intense pressure to control soaring inflation by raising interest rates. Data due on Thursday are expected to show that US consumer prices rose at an annual rate of 7.3 per cent in January, surpassing a 40-year high of 7 per cent in December, according to a Reuters poll of economists.
With the differences in unemployment rates, the prospect of higher interest rates makes some observers wary.
“The Fed is playing with fire,” said William Spriggs, a professor of economics at Howard University and the chief economist of the AFL-CIO, the labour union group. “And if they get it wrong, we’re all in trouble.”
For Spriggs, the Fed’s plans to raise interest rates in March bring to mind 2015, when the central bank approved the first increase after the Great Recession. At the time, millions of disadvantaged workers had yet to be drawn back into the labour force. Rates of unemployment among black workers, while declining, remained almost double the rate of white unemployment for years, while wages stagnated.
“We need to really make sure we’ve learned that lesson and make sure we get more black workers in good-paying jobs before the Fed hits the brakes on the economy,” said Lauren Melodia, deputy director of the Roosevelt Institute, a progressive think-tank.
The racial employment gap was finally closing in the years before the coronavirus crisis as the US jobless rate fell to a record low. Its reappearance has led advocates to caution that black Americans have not yet enjoyed the increased leverage given to workers in a tight labour market. Economists disagree on why, with some blaming the slow return of jobs in industries that disproportionately employ black Americans such as leisure and hospitality and others accusing employers of discrimination.
“From the perspective of black workers, we’re not there yet,” Spriggs said. “Black workers have increased their labour force participation, but they have not met with the success of finding jobs.” The labour force participation rate was 62 per cent for black workers in January, equal to the rate for white workers, according to the US Bureau of Labor Statistics.
The Fed has long encountered criticism from some quarters that it has prioritised the price stability aspect of its dual mandate over its other goal to maximise employment, to the detriment of black workers. However, others have charged that the keeping interest rates low worsens inequality by inflating the prices of assets owned by the wealthy, while making it difficult for working-class Americans to build up savings.
Unlike before the 2015 rate increase, rising gas and food prices in 2022 have intensified the urgency to hold prices in check.
“As long as [full employment’s’] huge benefits to workers in the black community are abstract and everyone can feel inflation immediately, it’s hard for the Fed to hold its ground,” Dulchin said.