Don’t Make the Fed’s Job Any Harder

Don’t Make the Fed’s Job Any Harder

(Bloomberg Opinion) — Democrats in Congress have introduced legislation to extend the Federal Reserve’s mandate and require the central bank to address racial injustice. So long as Republicans have a Senate majority, the measure is unlikely to pass — but that arithmetic might change next year.

Does it make sense to instruct the Fed to “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit,” as the new bill proposes?

Fed Chair Jay Powell appears to be skeptical. “You know, we don’t really have tools that can address distributional disparate outcomes as well as fiscal policy,” he said at his press conference on July 29. He said Congress is better equipped to do this job.

Powell is certainly right when it comes to monetary policy. The Fed’s instruments for steering aggregate demand are limited, in effect, to influencing interest rates. It couldn’t easily push demand in particular directions — to favor jobs in one sector or location, as opposed to others — even if it wanted to. The Fed could be told to prioritize high employment over low inflation (not that it has needed any such prompting lately), but it simply lacks the means to prioritize employment or income gains among African Americans or other disadvantaged groups.

Granted, Democrats have a point when they say that Fed policy has served to worsen broader kinds of inequality. A policy of very low interest rates has the side effect of boosting the value of financial assets, which widens the wealth gap between rich and poor, regardless of color. The answer to this is for fiscal policy to play a more expansionary role, so that monetary policy wouldn’t need to do so much. And fiscal policy, as Powell pointed out, is well suited to adjusting taxes and public spending in ways that help the poor.

The fact that monetary policy is ill-suited to addressing racial injustice doesn’t mean the Fed can’t do more in other ways. For instance, the central bank is a principal gatherer of economic data. Democratic presidential nominee Joe Biden has called on it to keep closer tabs on racial gaps in jobs, wages and wealth. That’s a good idea. And the Fed is also a financial regulator, with wide-ranging expertise in the functioning of financial markets and institutions. Its officials already pay attention to inequities in finance — as in a recent study of the fair-lending implications of targeted internet advertising. Such efforts should be scaled up and given greater prominence.

Nobody can fairly accuse the Fed of underperforming during the coronavirus emergency. On the contrary, it has distinguished itself, acting swiftly and competently to do all it can to support the economy. Congress should respect Powell’s reluctance to be given a new mandate his central bank can’t discharge. Once Democrats are in a position to make Congress act on racial injustice, they’d be well-advised to deploy their own powers to tax, spend and fight discrimination, rather than making the Fed’s job any harder.

Editorials are written by the Bloomberg Opinion editorial board.

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