Breakingviews - Powell’s inequality goals put him over his skis

U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world's largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque

WASHINGTON (Reuters Breakingviews) - Jerome Powell’s admirable inequality goals may have put him over his skis. The Federal Reserve boss wants to close the racial employment gap that widened as a result of the pandemic. But helpful policies are outside of his mandate, and the economy could overheat before the divide closes.

As expected, the Fed on Wednesday kept interest rates near zero and the agency anticipates it will keep them there through 2023. The nearly $2 trillion economic aid package just passed by Congress also encouraged the central bank to boost GDP growth rate projections for this year to 6.5%, compared to a December estimate of 4.2%. Still, Powell reiterated that the economy is a long way off from full employment.

The trouble is that full unemployment is something of a moving target. The Fed has said it wants to see a more inclusive recovery. In February, Powell noted that the Black unemployment rate reached a historic low of 5.2% in August 2019, compared to 3.4% for whites, the smallest gap since such data was first recorded. Since the pandemic, that disparity has grown. There was a 4.3 percentage-point difference in February, with the Black jobless rate at nearly 10%.

Powell hasn’t specified how much that would need to improve, but he also doesn’t have a lot of tools in his toolbox to control it. The Fed’s ability to change rates jolts the economy generally but has less impact on specific segments of the population.

The recent stimulus package will help, with estimates that it could cut the child poverty rate by 55% for Black families, according to Columbia University research. Still the flood of cash, including $1,400 checks to many families, helps white and Black families alike.

Other aspects to economic recovery could actually increase income disparity, like bubbling stock market prices that help portfolios heavily weighted towards white Americans. There are signs, too, that the improving economic picture may pressure the Fed to raise rates more quickly. Borrowing costs have already risen. On Wednesday, the yield on the 10-year Treasury hit 1.646%, a 13-month high.

The combination of near zero rates and trillions of aid money pumping into the economy has some economists, like former Treasury Secretary Larry Summers, worried about overheating. Powell could find himself in such a situation, with Black unemployment at still troubling levels, putting the Fed in a tricky spot.


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