The Fed is starting to pay closer attention to the other America

  • Inspired by Janet Yellen’s leadership and strong labour market focus, the Fed has placed increasing emphasis on its community development function.
  • The Fed’s role stems from its oversight of banks and enforcement of the 1977 Community Reinvestment Act.
  • David Erickson, economist and director of community development at the San Francisco Fed envisions a Beige Book for the less fortunate, he tells Business Insider.

Top Federal Reserve officials, inspired by Janet Yellen’s strong focus on the labour market both as an economist and policymaker, are paying a refreshing amount of attention to issues that are too often ignored in well-heeled central banking circles: inequality, poverty and community development.

The Fed’s community development function, while a small part of the central bank’s operations financially, has played an increasing role in two key areas: helping to solve local economic problems that are not easily addressed with conventional tools like monetary and even fiscal policy; and raising awareness among a fairly insulated group of central bankers about the poorer parts of the country.

“The macroeconomy is a summation of many micro economies and many of them are not doing so well

The macroeconomy is a summation of many micro economies and many of them are not doing so well

,” economist David Erickson, director of community development at the Federal Reserve Bank of San Francisco, told Business Insider in an interview.

It’s a great way to think about a country as diverse as the United States, the world’s largest economy, and a framework Erickson credits to his boss, San Francisco Fed President John Williams. And as the US housing crisis showed, what happens in financially-stressed communities can often serve as an early signal of broader economic troubles to come, said Erickson.

When Yellen, who will be replaced by Jerome Powell as Fed Chair in February, first took over as chair in early 2014, she shunned the usual visit to major business or financial industry groups, speaking instead at a community development conference in Chicago that included a visit to a manufacturing training center in one of the city’s many impoverished neighbourhoods. She subsequently made other such visits in Boston and other areas, and has been willing to meet with labour and community activists on a much more frequent, open basis than previous Fed chairs.

“A lot of her leadership filtered down,” said Erickson, who used to work directly under Yellen when she was president of the San Francisco Fed.

The Community Reinvestment Act

So why is the Fed involved in a concept some hard-nosed technocrats might see as too squishy for a central bank that’s supposed to be focused on its dual mandate of maximum employment and low, stable prices? The Fed’s community development role dates back to the 1977 Community Reinvestment Act, legislation aimed at ensuring banks were not unfairly depriving poor communities of credit or cutting them off from the broader economy.

The law’s goal is to

enhance the flow of investment capital for low- and moderate-income housing in low- and moderate-income neighbourhoods.” That includes things ranging from affordable housing construction financing to small business loans in places where they are harder to come by.

How do lawmakers ensure banks are complying? That’s where regulators like those at the Federal Reserve come in, and where the Fed’s community development power comes from. Supervisors have developed a ratings system whereby banks can earn points toward their CRA scores by making investments that count as aimed at disadvantaged communities.

Yet in fulfilling that role, the central bank has also developed a broad-based research and community outreach function comprised of some 150 staffers around the Federal Reserve system, which includes a Washington-based board and 12 district reserve banks. That means of lots of really interesting papers and conferences that bring together local employers with labour and community groups to grapple with many of the place-specific issues faced by poorer Americans.

“Our greatest strength is as neutral conveners and arbiters of ideas — what works in anti-poverty work?” Erikcson said. He is focused on the potential for new financial tools like social impact bonds, which try to align investments with desired social outcomes, to provide creative solutions to poverty, inequality and weak social mobility.

“You start unleashing market forces to achieve social goals,” he said.

Fed governor Jerome Powell, nominated by Donald Trump to replace Janet Yellen at the Fed’s helm when her term ends in February, has praised the Fed’s community development role for its ability to “mobilize

ideas, networks, and approaches that address a wide range of community and economic development challenges.”

The US economy has been expanding steadily since the end of the Great Recession in the summer of 2009, and the unemployment rate has fallen to a historically low 4.1%, prompting the central bank to begin tightening monetary policy after a long period of zero interest rates and bond purchases. But the recovery has been uneven, and millions of Americans feel left out because they have experienced little income growth or quality of life improvements.

A Beige Book for the ‘other America’

In a recent interview with Business Insider, St. Louis Fed James Bullard said issues surrounding community and workforce development are “very important to the macroeconomy if you think about American labour markets and how bifurcated they are,” between well-to-do professionals and a struggling working class.

“If we could get running on all cylinders and really using all our talent in the best possible way that would be a great gain for the US economy,” he said.

With this in mind, Erickson is hoping the Fed could start to aggregate some of the collective knowledge and insight that comes from the various regional community development experiences into a single report that captures some of the “other America” faced by poor and low-income families.

The Fed already does this for the business side of the economy, coalescing some of the anecdotes from regional Fed officials’ local contacts into a monthly report known as the Beige Book, which is widely read by financial market participants.

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