The Corner

Economy & Business

Fiddling with the Fed

Federal Reserve Building in Washington, D.C. (Joshua Roberts/Reuters)

The more I read defenses of the Democrats’ idea for changing the Federal Reserve’s mandate to require it to seek increased racial equality (which I wrote about here), the more it seems like they’re skipping a step in thinking it through.

Take Narayana Kocherlakota’s endorsement of the idea. A former Fed governor, he argues that Fed policy would have been better for everyone over the last few decades, and especially the last decade, if it had put weight on reducing the unemployment rate among blacks. It would have then pursued a looser policy than it did. Unemployment would have been lower across the board; and while inflation would have been higher, that would have been fine since it has been so low.

Let’s assume that Kocherlakota is right to think a looser policy would have been better. (I do, in fact, agree with him on this point.) The missing step is: Why do we think that adding a new statutory mandate to reduce racial inequality would have led to this better policy? The Fed during much of the last decade believed that if unemployment fell too low, inflation would start to rise in a dangerous way. The Fed would then have to tighten to stop it from climbing, even at the risk of causing a recession, and most people of all races would then be worse off.

The point is not that the Fed was correct in this assessment. It was clearly mistaken about how low unemployment could fall while inflation stayed low. The point, rather, is that it is not clear how a new congressional mandate to fight racial inequality would have changed that assessment. Here’s how Biden’s advisers reportedly imagine this would have worked:

Black workers have seen higher unemployment rates than other races for decades. So Biden’s camp says it’s wrong to consider a 5% jobless rate as “maximum employment,” as some did at the Fed in 2015, a time when the jobless rate for African-Americans remained at 9.4%.

Again, the Fed was wrong to think that 95 percent overall employment and 90.6 percent black employment was as good as the economy could do without higher inflation. Given that belief, however, it concluded that slowly tapping the brakes was the right thing to do. Why wouldn’t a 2015 Fed operating under the racial-equality mandate have just said, “Minimizing black unemployment over the long run requires us to start raising interest rates so as to keep inflation under control”?

A cynical way of putting this is that as long as the Fed has three statutory goals, it can always justify anything it does as a way of optimizing among them — and adding a fourth goal (racial equality) will only add to its freedom rather than constrain it. A more Fed-sympathetic way of putting it is that if the institution’s mental model of the economy is off, that’s what primarily needs changing.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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