The Federal Reserve System is one of the most important institutions in the entire American government. Its composition is also almost shockingly non-diverse, with zero African Americans or Latinos serving on the key panel whose decisions impact job creation and the pace of economic growth, despite fairly overwhelming evidence that Fed decisions impact racial groups differently.
What's more, the bodies that choose which people sit on that non-diverse committee are themselves extremely non-diverse — locking into place a system in which the interests of African Americans, Latinos, and lower-income people more generally may be underconsidered in making decisions about unemployment, inflation, and interest rates.
All this is the subject of a letter released at noon today by a group of 111 members of the House of Representatives plus 11 senators, headlined by Elizabeth Warren, Cory Booker, Bernie Sanders, Jeff Merkley, Kirsten Gillibrand, and Al Franken, demanding that the Fed pay more attention to diversity in its ranks.
The key graf:
According to a study by the Center for Popular Democracy released in early February, 2016, 83 percent of Federal Reserve head office board members are white, and men occupy nearly three-fourths of all regional bank directorships. The lack of public representation on regional Banks’ boards is even more distressing in light of the lack of diversity among regional Bank presidents and the resulting lack of diversity on the Federal Open Market Committee (FOMC). Currently, 92 percent of regional Bank presidents are white, and not a single president is either African-American or Latino. Moreover, at present 100 percent of voting FOMC participants are white, while 83 percent of regional Bank presidents and 60 percent of voting FOMC members are men.
Progressives interested in monetary policy issues have long struggled to engage the public, activist groups, or elected officials in the topic. The focus on diversity from the left-wing Center for Popular Democracy's "Fed Up" campaign that inspired this letter represents a new tactical effort to change that.
Diversity among decision-makers is not, of course, directly a monetary policy issue. But as the letter points out, monetary policy does have significant consequences for racial disparities in employment. They cite research from the Economic Policy Institute "demonstrating that for every .91 percent reduction in unemployment for whites, black unemployment drops 1.7 percent" meaning that African Americans have more to gain from monetary policy that is more pro-growth and less inflation-averse.
Michigan Representative John Conyers who was one of the main driving forces behind the letter issued a statement observing that "Detroit and cities across the country with high minority populations have some of the highest unemployment rates and will be harmed if the Federal Reserve does not consider our needs when they make key policy decisions."
How the Federal Reserve is organized
The specifics of the letter hinge on the structure of the Federal Reserve system, which is, in a word, confusing.
The main hub of the Fed is the Board of Governors in Washington, DC, which consists of a chair, a vice chair, and five other board members. Currently there are two vacancies on the board, and all five board members are white.
In addition to the Board of Governors, there are 12 regional Federal Reserve banks, each of which has its own president and its own board of directors. Each bank's president is selected by its board, with the choice subject to confirmation by the main board. Each regional bank board itself is composed in part of members selected by the private banks of the region and in part of members selected by the central board.
Monetary policy decisions are made by what's known as the Open Market Committee. The committee is composed of the seven members of the Board of Governors (at present, again, there are two vacancies) plus the president of the New York Fed, plus four other regional bank presidents serving on a rotating basis.
The point of the letter is that all these various groups underrepresent women and massively underrepresent African Americans and Latinos.
Today's Fed neglects race
Diversity of membership is neither necessary nor sufficient to ensure that a broad range of interests is represented. But there is considerable evidence that the current not-so-diverse group of monetary policymakers is not considering the full range of interests in American society.
Narayana Kocherlakota, the former president of the Federal Reserve Bank of Minneapolis, was the only nonwhite FOMC member during his term and offered this observation back in January:
However, there is one key source of economic difference in American life that is likely underemphasized in FOMC deliberations: race. Let’s look, for example, at the most recently released transcripts for FOMC meetings, which cover the year 2010 (my first full year on the Committee). It was a challenging year for the US economy as a whole, as the unemployment rate was above 9 1/4% in every month. But it was especially challenging for African-Americans: In every month of 2010, the unemployment rate among African-Americans was at least 15 1/2%. I did a search of the hundreds of pages of the meeting transcripts. Based on that search, my conclusion is that there was no reference in the meetings to labor market conditions among African-Americans (or Black Americans).
Monetary policymakers, with their needed independence, always risk being (or at least being seen as) insufficiently empathetic to the lives of their nations’ citizens. The Federal Reserve Act has mitigated this risk in the US by ensuring that an appreciation for economic diversity is at the heart of the FOMC’s deliberations.
The details of monetary policy get pretty complicated, and there's rarely been much sign of normal people being interested in them. But issues about who is represented and whose interests get discussed are easier to understand, so you can see why this particular angle is gaining momentum in Congress.
After the release of the letter, Hillary Clinton also weighed-in on the issue via spokesman Jesse Ferguson who offered a statement:
The Federal Reserve is a vital institution for our economy and the wellbeing of our middle class, and the American people should have no doubt that the Fed is serving the public interest. That's why Secretary Clinton believes that the Fed needs to be more representative of America as a whole as well as that commonsense reforms — like getting bankers off the boards of regional Federal Reserve banks — are long overdue. Secretary Clinton will also defend the Fed's so-called dual mandate — the legal requirement that it focus on full employment as well as inflation — and will appoint Fed governors who share this commitment and who will carry out unwavering oversight of the financial industry