In pursuit of a 'soft landing,' the Fed must not neglect the vulnerable

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Under Chairman Jerome Powell's leadership, the Federal Reserve may have threaded one of the most complicated needles ever, bringing our economy out of excessive inflation to the much-hoped-for "soft landing," rather than a recession. But that doesn't answer the question that we and other civil rights advocates raised when we met with Chairman Powell and several other Federal Reserve governors just two weeks before this latest quarter percent interest rate rise, a question that our most important regulatory agency has mostly avoided talking about: If they succeed, which communities are in for a soft landing and which communities will face a crash landing?

Just recently in April, unemployment for the Black community hit an all-time low at 4.2%. This is important because if the average national unemployment hits 4%, the general economic rule of thumb is that Black unemployment will hit 8%. Further, as interest rates rise, not only do they disproportionately impact employment rates for communities of color, but they also have a detrimental impact on the overall fight to close the racial wealth gap. In addition to increased unemployment for our communities, high interest rates push homeownership farther and farther out of reach for millions of working-class Americans, particularly Americans from the Black, Latino and certain Asian and Pacific Islander communities. Because homeownership remains the primary way American families build wealth, this perpetuates our nation's yawning racial wealth gap.

According to Freddie Mac, last year's increase in interest rates from early 2022 to November 2022 effectively reduced the number of homeownership-ready Americans by about 15 million. Today Blacks and Latinos have a homeownership rate of 44% and 51%, compared to 65% for white Americans. This is a direct cause of the racial wealth gap where, for every $1 of wealth held by a white family, Black and Latino families only have, on average, about $0.24 cents.

Unfortunately, this fits into an economic pattern that's existed in its current form for the past hundred years, and has been actively abetted by many federal regulatory agencies, including the Federal Reserve. From the 1930s through the passage of the Fair Housing Act in 1968, it was perfectly legal to deny non-white families mortgages, small-business loans and access to higher education, a practice known as redlining. Indeed, that practice was sanctioned for decades by federal housing agencies, which circulated now-infamous redlining maps.

In the 1980s, Black- and Latino-owned savings and loans were collateral damage in federal regulatory efforts to address S&L industry excesses that were themselves caused by a lack of oversight by federal regulators. Those excesses were not driven primarily by S&Ls owned by people of color, but that's whose savings institutions were almost completely wiped out. In the 2000's, yet another failure of oversight led to the Great Recession that wiped out 30 years of wealth in the Black, Latino and Asian American communities in just three years.

While no one expects a comparable calamity anytime soon, the Federal Reserve's preferred inflation-fighting tool is designed to cool wage growth and drive up unemployment and will, without a doubt, have a disproportionately negative impact on communities of color.

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August 11

We do not purport to have the same training in economics or access to data that Chairman Powell does. And we recognize the complexity of the Fed's dual mandate, to maintain price stability while maximizing employment. But what we do have access to is the experiences of communities of color who have too often been left out of the great American economic project and treated as an afterthought in a rush to create benefits for "real Americans."

The Federal Reserve's fight to protect our economy by controlling inflation is extremely complex, and the magnitude of its responsibility is not one we would wish for ourselves. However, we do believe attention must be paid to the many distinguished economists who have described several other methods of fighting inflation that might be more germane to the current situation and cause less disproportionate harm to the working Americans whose labor has kept our economy strong as we navigate one crisis after another.

One that resonates and would go a long way in building community support is to heed the call of Lael Brainard, director of the National Economic Council and former vice chair of the Federal Reserve, to study the impact of shrinking outsize corporate profit margins rather than incentivizing economy-wide layoffs to tame inflation. This makes sense, because a growing number of economists — including some who work at the Fed — see rising corporate profits (which some might call profiteering) as a key driver of recent inflation.

Regardless of whether this approach ultimately proves to be a viable alternative, we call on Chairman Powell to use the power of the Federal Reserve to seriously consider alternatives to a cure that — for many communities of color — will do as much harm as the sickness that officials want to eradicate.

We do appreciate Chairman Jerome Powell and three other Fed governors for hosting us and taking the time to discuss how communities of color are collateral damage in the current inflation fight. We believe this dialogue must continue and that we must all work together to mitigate the pain and make sure no American community becomes a needless casualty of the war on inflation.