Graeme Sloan/Sipa USA via AP Images
Federal Reserve Chair Jerome Powell speaks at a press conference following a Federal Open Market Committee meeting in Washington, July 26, 2023.
Three years ago at the semiannual monetary policy hearing before Congress, Congresswoman Ayanna Pressley gave Federal Reserve chair Jerome Powell a history lesson about the institution he controls. Colloquially known as the Humphrey-Hawkins testimony, the 1978 Full Employment and Balanced Growth Act requires the Fed to testify before Congress twice a year. It also fully institutionalized the Fed’s dual mandate of maximum employment and reasonably stable prices. Stunned after hearing Pressley describe how the law was won by civil rights activists like Coretta Scott King, Powell stammered, “First, thank you for that history, I didn’t know that.” He then went on to affirm the Fed’s employment mandate.
Three years later—after 16 months of mostly unabated interest rate hikes, with inflation declining—it remains questionable whether Chair Powell truly takes his employment mandate seriously and understands the economic pain among the most vulnerable that the Humphrey-Hawkins Act was designed to prevent. Indeed, the key reason Coretta Scott King and her Full Employment Action Council wanted the Fed chair to answer to Congress in the 1970s was to prevent the Fed from using unemployed people as a means to stabilize inflation. They saw it as unfair and unjust, a form of policy violence against people of color, women, the elderly, and all those who faced employment discrimination. As championed by Rep. Augustus Hawkins (D-CA), a leading member of the Congressional Black Caucus, the Humphrey-Hawkins Act sought to rein in the Fed, to keep it accountable to Congress and its statutory mandate.
It remains questionable whether Chair Powell truly takes his employment mandate seriously and understands the economic pain among the most vulnerable.
Had Powell taken this history more seriously, he would have resisted the call to hike interest rates yet again at the latest July meeting. In April, the Black unemployment rate ventured below 5 percent. April 2023 thus joined the World War II and Korean War periods as the only times in modern history that the rate has dropped below that critical benchmark. Yet over the past few jobs reports, the Black unemployment rate has ticked up again. This should be a warning sign in otherwise good jobs reports. At the same time, inflation is trending down, reducing the putative need to hike again.
In the 1960s, Hawkins, who represented the majority-Black Los Angeles community of Watts, had authored Title VII of the 1964 Civil Rights Act to prevent employment discrimination. In the next phase of legislative struggle, he partnered with King to augment the civil rights achievement of fair employment with full employment. Hawkins and King understood that anti-discrimination law meant little if the unemployment rate for Black workers ran as high as 15 percent, as it did after the 1973–1975 recession. Traditionally, the unemployment rate for Black workers runs almost twice as high as for white workers. Soft landings—few and far between as they are—haven’t felt soft for workers who face discrimination.
The struggle for the Humphrey-Hawkins Act pointed to a different way to manage inflation, one that no longer relied on recessions or slowdowns (and thus unemployed people) to achieve price stability. While it didn’t make it into the final law, earlier versions of the legislation proposed using a combination of tax policy, anti-monopoly policies, and direct price regulation as more fair ways to address inflation. Yet despite its promise, enforcement was still lacking. Within a year after its passage, Hawkins was sounding the alarm. “The Humphrey-Hawkins Act Is Being Violated,” he titled a September 1979 article. In a May 1980 hearing, he stressed that the law that bore his name “explicitly prohibits using unemployment as a tradeoff to reduce inflation.”
The Fed has often taken wide leeway with its interpretation of the law. As Columbia Law’s Lev Menand has put it, “the Fed tends to be the final interpreter of its own enabling statute.” This was the harsh lesson that Hawkins would confront. Despite his and King’s efforts to hold the Fed accountable to Congress, under Fed chair Paul Volcker, the Fed would tell Congress that the only way to achieve long-term maximum employment was to focus on inflation. This helped set an institutional pattern of the Fed putting their employment mandate on the back burner. Volcker once summarized the situation bluntly: “I do not remember the word ‘dual mandate’ ever passing my lips in all the time that I was chairman.”
Over the past year and a half, as the Fed tightened, many worried that the rapid interest rate increases would “break something,” catalyzing a sequence of unforeseen crises and dislocations. Powell had seemed unbothered by such a prospect. Yet as it appeared that Silicon Valley Bank (SVB) might be the first domino to fall, the Fed leapt into action. It quickly introduced a new emergency program, augmenting its regular discount lending window, which allows banks to mitigate their interest-rate risk due to the Fed’s tightening. What about the millions of workers who may lose their jobs due to the interest rate hikes? Thankfully, this hasn’t happened yet. But if it does, who will create an emergency program for unemployed people, those whose job prospects were seen by the Fed as an appropriate cost of managing inflation?
As the Fed raised rates from late March to June, and again last week, each by another 25 basis points, it has become increasingly clear: the Fed has been courting a recession, once again betraying its employment mandate. “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions,” Powell told reporters after the March increase. Powell also conceded that the banking crisis can effectively operate as a rate hike (“the equivalent of a rate hike or perhaps more than that,” he said).
In the final weeks of March, bank lending decreased to its lowest point in 50 years. Indeed, at the March meeting, Fed staffers warned of the potential of a recession later this year. They also cautioned that “historical recessions related to financial market problems tend to be more severe and persistent than average recessions.” At the present moment, it appears that all the recession talk has been wrong, in no small part thanks to the surge in investment from the Biden administration’s fiscal policies. But given the stakes, we are correct to worry.
The Fed’s choice to use its emergency lending authority under Section 13(3) of the Federal Reserve Act to forestall the banking crisis revealed the two-tiered system under which we operate. Whose emergencies count at the Fed? “Often when the Fed says it cannot do something, what it really means is that it does not want to … Laws can be stretched,” The New York Times’ Jeanna Smialek writes in her recent book on the Fed’s COVID crisis response about its resistance to supporting states and municipalities.
Indeed, when and for whom the Fed is willing to stretch is precisely the issue. Historically and today, the Fed has stretched the employment mandate beyond recognition. On the other hand, though the inflation mandate calls for “reasonable” price stability, the Fed has remained wedded to a vision of this as 2 percent inflation, regardless of the unique circumstances of the recent inflation.
For those of us interested in economic stability for everyone, it has been hard not to see the inequities of the response to the SVB collapse. If the household balance sheets of two million workers were crushed by the Fed’s hiking trajectory, then so be it; that was basically the point. But if banks’ balance sheets were in peril, then it’s all hands on deck, emergency facility and all.
None of this means that the Fed should not have responded to the banking crisis. The point is, Congress and the Fed need to ask themselves and each other whether this two-tiered and inequitable system is the best we can come up with to manage a modern and complex 21st-century economy.
