Skip to main content

Biden Wants The Fed To Help Close Racial Economic Gaps. How Would That Work?

NPR WAMU

By Danielle Kurtzleben

August 1, 2020

One former Fed governor believes that just the communication part of the Biden policy would play a big part in shrinking racial gaps.

“I think that you could go a long way simply by saying to the Fed, ‘Look, we want you to report on a regular basis about the gap between Black unemployment and white unemployment, and how are your policy choices likely to influence that gap?’ ” said Narayana Kocherlakota, professor of economics at the University of Rochester and former president of the Minneapolis Fed. “I think anything the Fed has to pay attention to in its reports to Congress or the public immediately flow into decision-making.”

He also sees past Fed policy as being too tight and thinks paying attention to racial economic gaps would prevent those kinds of moves in the future.

“I think it really would put an alert on the Fed about tightening too early, which I think unfortunately, I think we saw a lot of in the last slow recovery from from the Great Recession,” Kocherlakota said.

But then, not everyone agrees that the Fed should be targeting racial gaps. Former Congressional Budget Office Director Douglas Holtz-Eakin told the Wall Street Journal earlier this week that he thinks this type of Fed policy would be “a long way from their traditional mandate.”

In addition, it’s also possible that such a policy wouldn’t be very effective at shrinking gaps. That’s the view of Sandy Darity, an economist at Duke University.

“I don’t see any way that aggregate interest rate policy will reduce the gap,” Darity wrote in an email to NPR. “Since the unemployment rate gap is an index of the degree of discrimination in employment in the economy, and interest policy has no impact on discrimination, I have no idea why anyone would believe conventional Fed monetary policy cold have an effect on the black-white ratio of unemployment rates.”

He added that he would prefer the Fed to instead “play a direct role in financing reparations for black American descendants of U.S. slavery.”

Biden has said he supports a study of reparations, but his racial equity plan does not call for that kind of policy.