The Federal Reserve Has Had a Diversity Crisis Long Enough

I’m not an economist. I don’t spend much time polling people’s monetary policy thoughts. But I am a community activist who often speaks with Black and Brown families about whether this economic recovery works for them – and that’s when people start discussing the Federal Reserve (even if they don’t know it).

Sure, nobody likes inflation. But people also feel ticked because real wages have remained stagnant for over 40 years – and Black workers have experienced unemployment rates twice as high as white workers historically. Those circumstances started improving as the Fed changed its policy framework and began focusing on creating a full-employment economy. But recent Fed actions to raise rates could take us backward and undermine a job market that is finally starting to work for communities needing the most help. 

That’s where the Fed’s diversity factors heavily. Their choices carry direct implications for the community. Fed leaders should be representative of the country’s population. If they don’t understand us, they can’t represent us.

My organization, the Center for Popular Democracy, just released a report that shows how badly the Fed is failing to achieve genuine diversity. Some quick facts:

•     75 percent of the Fed regional bank presidents are white.
•     77 percent of all the directors of the regional Fed banks come from banking, finance, or business interests.
•     74 percent of the directors representing business interests come from a big business.
•     A staggering 1 in 10 Fed directors is currently a CEO of a Fortune 500 Company despite such CEOs representing just a minuscule fraction of the workforce.

The Fed’s long-standing diversity problems make their leadership disconnected from their policies’ impact. They held onto a stale economic model for “natural rate of unemployment” for decades after it should’ve been retired. That model held unemployment unnecessarily high, particularly for Black and Brown communities. As a result, wages remained low for years – an issue Fed leaders didn’t seem to notice.

People from my community understand the issue. When I show them a chart depicting the overwhelmingly white, male Fed leadership over time, they recognize that a Fed that doesn’t look like them won’t set policies that account for their pain. But Fed leaders should represent the country’s diverse interests – according to the Federal Reserve Act, which specifies that regional Fed bank directors must come from a wide array of economic interest groups. 

The Fed has made some progress: The Senate confirmed Lisa Cook to the Fed Board of Governors – making Cook the first Black woman ever to join the Fed’s principal governing body. Currently awaiting Senate confirmation, Philip Jefferson would become just the fourth Black man on the Fed Board over its 108-year history. Raphael Bostic broke barriers in 2017 as the first African American appointed president of a regional Fed bank.

But Fed leaders have additional changes to make if they want to improve their diversity and finally act based on everyone’s economic interests. The debate happening within current Fed leadership provides a perfect example. We are all concerned about inflation. But the Fed’s tool for addressing inflation is hiking interest rates to slow the economy, slow wage growth, and bump up unemployment. Who’s most hurt by that? Black and working communities. The Fed’s choice isn’t simple, but they have to start considering everyone to get the balance right.  

First, the Fed must take advantage of upcoming opportunities to make diverse regional Fed bank presidential appointments. The Reserve Banks of Kansas City and Chicago must choose new presidents this year, and the Reserve Banks of Cleveland and Philadelphia must choose soon after. It’s time these presidents look more like the rest of us – and there’s never been a Latinx Fed bank president. That must change.

The Fed must change its process for appointing new leadership. It’s no accident that the regional bank directors are still predominantly white and from banking and big business. Private banks choose two-thirds of these directors. Those directors appoint regional bank presidents. So it’s no surprise that leadership at our most important public economic policy institution resembles a corporate boardroom instead of the rest of the country.

Congress must pass laws that stop private bankers from dominating Fed regional leadership. It’s an anachronism from an older era of the Fed’s history and unconscionable today. But the Fed Governors can make some substantial progress by making the appointment process for regional bank directors and presidents more transparent and engaged with the public. The current process is absurdly and purposefully opaque, but a little sunlight can go a long way to clearing the backroom smoke.

People in my community cannot overlook the Fed, and the Fed can’t ignore us. The Fed created this diversity crisis. It’s time to end it.