Fed Chair Janet Yellen has to engage in a pretty serious balancing act when she speaks publically. She doesn’t want to shock the markets (unless there’s a good reason to do so), and she’s under pressure from hawks and doves to raise and not raise rates, respectively. Meanwhile, in her heart and brain she’s a deeply nerdly and insightful macroeconomist, so she’s also trying to explain the economy, often to people who don’t listen that well. FWIW, I think she does an admirable job juggling all of that.
But everyone under such scrutiny will on occasion say things the wrong way, and I thought she did so yesterday in an exchange with a few members of the House during testimony. She was asked about the extent to which the Fed could make a difference in “the fact that minority communities still face unacceptable high rates of unemployment.”
Her response (beginning with her characteristic “so”):
“So, there really isn’t anything directly that the Federal Reserve can do to affect the structure of unemployment across groups, and unfortunately, it’s long been the case that African-American unemployment rates tend to be higher than those of on average among — in the nation as a whole. It reflects a number of different sources of disadvantage that are operative there.”
What’s missing here—though it was probably implicit in Yellen’s thinking—is the critical observation that black unemployment tends to be twice that of the overall rate, and more than twice the white rate. Moreover, this level difference translates into change differences such that a one percentage point decline in overall unemployment often leads to a two point decline for blacks. See here for more details, e.g., “black unemployment has averaged almost twice that of overall unemployment since the monthly data begin in 1972 (average: 1.9, with standard deviation of 0.15, so not a ton of variation around that mean).”
In that sense, the Fed has the potential to make a huge structural difference in the economic lives of blacks and other minorities by heavily weighting the full employment part of the their mandate relative to the inflation part, especially since there’s still considerable slack in the job market, with lower-wage, minority workers facing the brunt of it, and—importantly—little evidence of inflationary pressure (if anything, the Fed has missed their inflation target on the low side for a few years running now).
“So,” as Chair Yellen might say, it would have been useful to acknowledge this structural relationship and the importance to black workers of getting the “weights” right at this point, emphasizing the critical role of the Fed in holding off on tightening too soon such that the recovery can reach those who still haven’t been lifted by it.
Chair Yellen well knows this 2:1 problem, and I take her comments to mean that there’s not much the Fed can do to change it, though, again, she needed to say that the Fed can tap it to the great benefit of un- and underemployed minorities. However, economist Bill Spriggs, who knows a lot about this, argues something that is true and important in this space—I know this because I’ve seen it with my own eyes, both in the data and in the anecdotes: at full employment, employers cannot afford to discriminate against minorities the same way they can in slack markets.
And what Bill will tell you is that this phenomenon has the potential to reduce that 2:1 ratio, which would be a tremendously beneficial structural advance.