World Economy

Fed Under Immense Pressure to Reform System

The Federal Reserve Headquarters in WashingtonThe Federal Reserve Headquarters in Washington

The US Federal Reserve has two guiding goals when designing monetary policy: maximum employment and stable inflation.

But as the country's central bankers converge for their annual symposium in Jackson Hole, Wyoming, this week, they are under increasing pressure to reform their own system and goals to better reflect the diversity of America and its incomes, news outlets reported.

At this year's flagship economic policy conference, from Aug. 25 to 27, US policymakers will confer not only with their counterparts from around the world but also host a meeting on Thursday with a group calling for a radical overhaul of the Fed.

For a few days, the mountain air ripples with dense discussions of interest rates, inflation dynamics, unemployment, risk, recession and so on.

As is typically the case with Fed events, everyone’s listening for hints about the central bank’s next interest rate move, and this year, Fed Chair Janet Yellen’s big talk on Friday will be even more closely scrutinized than usual. As people say: Fed types do not just contradict each other, now they contradict themselves.

This is a reference to recent, very insightful work by the president of the San Francisco Fed, John Williams, whose inner dove (keep rates low) is fighting with his inner hawk (raise rates soon).

The activists will look to build on their proposals, put forward in conjunction with former top Fed policy adviser Andrew Levin, to make the Fed's 12 regional banks government entities. The Fed is the world's only major central bank that is not fully public.

Powerful Allies

The group has recently been joined by powerful allies in Congress in forcing racial, gender and income inequality up the Fed's agenda.

Democratic presidential candidate Hillary Clinton has come out in favor of restricting the financial world's influence on regional Fed boards.

In May, 127 US lawmakers including Senator Elizabeth Warren and former Democratic presidential candidate Bernie Sanders sent a letter to Yellen urging more diversity among its ranks in order to "reflect and represent the interests of our diverse country."

Signs of Change

There are indications that the steady drumbeat of pressure is having some effect on areas on which the Fed does have some control.

"I believe that diversity is extremely important in all parts of the Federal Reserve," Yellen told Congress in June under sustained scrutiny from lawmakers about the Fed's performance.

Minorities now make up 24% of regional Fed bank boards, up from 16% in 2010, while 46% of all directors are either non-white or a woman.

Yellen, who has not been shy in speaking on income inequality, has also noted that rising inequality could curb US economic growth.

And for a Fed not used to addressing distributional issues associated with monetary policy, such considerations are now seeping into policy discussions.

"The unemployment rate for African Americans and for Hispanics stayed above the rate for whites..." the Fed noted in minutes released last week from its policy meeting in July.

Or as Yellen put it to Congress in June, "We're certainly very focused on...wanting to promote stronger job markets with gains to all groups."

Stocks on Wall Street closed slightly lower in quiet trading after drifting most of the day between gains and losses. Energy companies fell with the price of oil, while biotechnology and drug companies rose after Pfizer announced it was buying a cancer drug maker.

The Dow Jones industrial average lost 23.15 points, or 0.1%, to close at 18,529.42. The Standard & Poor’s 500-stock index lost 1.23 points, or 0.1%, to 2,182.64, and the Nasdaq composite index rose 6.23 points, or 0.1%, to 5,244.60.