America’s hiring boom of the past year has narrowed racial disparities in unemployment. Yet the Federal Reserve’s ongoing interest rate hikes — shaping up to be the steepest in 15 years — threaten to reverse that progress.
The Fed’s rate hikes will mean higher borrowing rates that could hobble the job market and undercut a goal the Fed unveiled two years ago: To keep rates ultra-low for as long as possible, to help less advantaged workers, who often don’t benefit much from job growth until late in an economic expansion.
Now, though, facing the worst inflation in four decades, the Fed has begun tightening credit and is expected to keep raising its benchmark short-term rate multiple times this year and next. Such rapid hikes typically slow borrowing and spending and can raise unemployment and even cause a recession. During such downturns, Black and Hispanic Americans commonly suffer higher jobless rates.
The Fed’s shift away from low rates comes as the African American unemployment rate has reached 6.6%, down sharply from its pandemic high of nearly 17% and a relatively low level historically. Yet it remains twice the 3.3% rate for whites. Hispanic unemployment is 4.4%.
“The reason why this matters in the Black community is because we are literally the last hired, and it’s only when you get to this point in a recovery where black workers really see their gains,” said William Spriggs, chief economist at the AFL-CIO. “When you slow the pace of hiring, then you cut off that path.”
On Friday, the government will issue the March jobs report, which could shine further light on racial disparities. Economists estimate that employers added a healthy 478,000 jobs last month and that the unemployment rate dipped from 3.8% to 3.7%, according to data provider FactSet. That would be near the 3.5% rate just before the pandemic struck, which was the lowest level in a half-century.
In August 2020, the Fed redefined its goal of maximum employment as being “broad-based and inclusive.” For the first time, it would look beyond the overall unemployment rate and also consider jobless rates for Black and Hispanic workers in setting interest rates. Fed officials hoped that by keeping rates down, they could help narrow the nation’s persistent racial unemployment gaps.
The policy represented “a significant shift,” said Stephanie Aaronson, director of economic studies at the Brookings Institution and a former Fed economist. “Prior to that, every Fed chair would have said something along the lines of, a rising tide lifts all boats. Now they were saying, a rising tide lifts all boats — but not to the same level, and not at the same pace.”
For Chair Jerome Powell and other Fed officials, the goal was to keep the economy running “hot” to reduce unemployment as much as possible. The Fed also wanted to raise too-low inflation, which had stayed stubbornly below its 2% annual target for roughly a decade.
In a so-called hot economy, businesses become so desperate for workers that they hire applicants they would otherwise have neglected. They are more likely, for example, to hire and train workers who lack certain skills or even people who have completed prison sentences.
But the pandemic has upended the Fed’s intentions. The combination of supply-chain snarls and robust consumer demand, fueled by government rescue aid and the Fed’s own low rates, fed an unexpectedly large and persistent spike in inflation. The result is that the central bank must raise rates to fight inflation.
Powell and other Fed officials say they hope that by doing so, they will prolong, rather than derail, economic growth and further narrow racial inequities. Among those officials is Raphael Bostic, president of the Federal Reserve Bank of Atlanta, who said last week that he expected the economy to keep growing even in the face of higher rates.
“And if that is in fact what happens, then it is possible that we can still see the narrowing of these (racial) gaps,” Bostic said.
With inflation chronically high, economists are in overwhelming agreement that the Fed has no choice but to tighten credit — perhaps aggressively — well into 2023.
“When inflation is not a problem, then it’s much easier to say, ‘We’re going to maximize employment and see how far we can take this,’ ” said Valerie Wilson, director of the Economic Policy Institute’s program on race, ethnicity and the economy. “But with inflation in the mix, they’re in a position now where they can’t really ignore that.”
The seeds of the Fed’s shift toward pursuing a more inclusive recovery were sown during the economic expansion that followed the 2008-2009 Great Recession, the longest in U.S. history. The Fed pinned its key rate at nearly zero in December 2008, where it remained for seven years. Over time, its policies helped shrink unemployment to its lowest point in a half-century. Black and Hispanic jobless rates reached record lows.
Black unemployment fell to 5.4% in 2019, the lowest on records dating to 1972. It was just 1.9 percentage points above the white rate of 3.5%, the smallest such gap on record.
Other racial gaps vanished altogether. The proportions of Black and white Americans who were either working or seeking work equaled each other in 2019, for example, after roughly four decades in which Black workers had trailed whites.
In part, that reflected an aging white population with comparatively more retirements. But it also resulted from a steady rise in Black Americans who either found jobs or had begun seeking one.
That progress bolstered a view among economists that the Fed’s rate policies could make a major difference. Research by Aaronson found that when the unemployment rate falls especially low, disadvantaged groups disproportionately benefit.
Still, the reality that racial unemployment gaps exist even during hot economies has fueled a perception among economists that there are limits to what the Fed’s low rates — and a strong economy — can achieve. Economists generally believe that federal spending and tax policies have a more significant impact on household finances.
Algernon Austin, who leads the race and economic justice program at the Center for Economic and Policy Research, suggested that while the central bank deserves credit for pursuing an inclusive recovery, “what the Fed does is not going to solve the problem.”
Likewise, Powell said last year that he believed Congress and other institutions would have to pursue policies, in education and other areas, to fully eliminate racial inequalities in jobs and incomes.
“We would all love to see no such gap,” he said. “I think eliminating inequality and racial discrimination … is really something that fiscal policy and other policies — frankly, education policies and that kind of thing — are better at focusing on.”
For now, Black Americans face higher unemployment than whites at every level of education, according to data compiled by the Economic Policy Institute. In 2019, Black workers with a four-year college degree had a higher jobless rate than whites with only some higher education did.
Spriggs suggested that stricter enforcement of civil rights laws to fight discrimination in hiring could help narrow the racial disparities. The Equal Employment Opportunity Commission’s budget has stagnated for years, Spriggs noted, even while it has taken on additional tasks, including the enforcement of age bias laws.
Better enforcement by the EEOC might, for example, help address the fact that Black unemployment has remained roughly double the white rate for decades. At a conference last week held by the Brookings Institution, William Darity, an economist at Duke University, called that ratio “a powerful index of discrimination.”
Darity has called for a federal jobs guarantee that would give the unemployed the option of a public sector job. With that policy as a “cushion,” Darrity said, “the Fed could tackle inflation without fear of extreme adverse social consequences.”
In a speech last February, Powell acknowledged the limits of the Fed’s powers.
“Over the course of a long expansion, these persistent disparities can decline significantly,” he said. “But without policies to address their underlying causes, they may increase again when the economy ultimately turns down.”
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