The Fed tackles inflation with its most diverse leadership ever
JACKSON HOLE, Wyoming
When Diane Swonk first attended the Federal Reserve’s annual economic conference in Jackson Hole in the late 1990s, there was a happy hour for women attending the event. He barely filled a single table.
Today, the “Women at Jackson Hole” happy hour draws dozens of top female economists and policymakers from the United States and overseas.
“I’m just glad there’s a ladies’ room line now,” said Swonk, a longtime Fed watcher who is chief economist for accounting giant KPMG.
It’s not just in Jackson Hole, but also in the Fed’s boardroom, where his leadership has become the most diverse of all time. There are more female, black and openly gay officials contributing to the central bank’s interest rate decisions than at any time in its 109-year history. Many are also far less wealthy than the officials they replaced.
Over time, economists say, a wider range of voices will deepen the Fed’s outlook as it weighs the consequences of raising or lowering rates. It can also help diversify a profession that historically has not been seen as particularly welcoming to women and minorities.
“Overall it’s helpful,” said William English, a former senior Fed economist who teaches at the Yale School of Management. “There is evidence that diverse groups make better decisions.”
The central bank, as it does now, raises its short-term policy rate when it wants to lower inflation, and lowers it when it wants to boost hiring. These moves, in turn, affect borrowing costs across the economy – for mortgages, auto loans and business loans, among others.
In his address to the Jackson Hole symposium on Friday, Chairman Jerome Powell stressed that the Fed is planning further rate hikes and plans to keep its benchmark rate high until the worst bout of inflation in four decades s ‘attenuates considerably – even if it leads to job losses and financial hardship for households and businesses.
Rhonda Vonshay Sharpe, economist and president of the Women’s Institute for Society, Equity and Race, said she welcomes the Fed’s expanded leadership. Sharpe said she “hopes a more diverse group of people will pay attention” to what the Fed is doing and aspire to high-level economic roles.
Colleges and universities, she suggested, should do more to encourage and prepare students for economic careers, including directing more of them towards the study of mathematics.
Change at the Fed has been swift, with three African Americans and three women joining the central bank’s 19-member interest rate committee this year alone. (Under the Fed’s rotation system, only 12 of the committee’s 19 members vote on its rate decisions each year.)
The influential, Washington-based seven-member Fed Board of Governors now includes two black economists, Lisa Cook and Philip Jefferson, who were both appointed by President Joe Biden and sworn in in May. They are the third and fourth blacks on the board. Governors can vote on every Fed rate decision.
Biden also elevated Lael Brainard, governor since 2014, to the powerful post of vice chairman of the council.
Additionally, two of the presidents of the Fed’s 12 regional banks are now black — Raphael Bostic of the Atlanta Fed and Susan Collins of the Boston Fed. Collins, a former University of Michigan provost, became Boston Fed chairman this year. Bostic took office in 2017.
Just last week Lorie Logan, a former top New York Fed official, became Dallas Fed President. Five of the presidents of regional mutuals are women.
Nela Richardson, chief economist at payroll processing company ADP, noted that the education and experience of the new decision makers is similar to that of their predecessors, with Cook, Jefferson and Collins all holding doctorates. economists — an above-average proportion among new Fed officials, she said.
Richardson suggested it was especially important to have more women in Fed leadership now because many of the problems facing the central bank – including the very low unemployment rate that is fueling wage increases and inflation – are linked to women’s ability to join the labor market. Fewer women, especially mothers of young children, are now working compared to pre-pandemic trends.
This shortfall is due, in part, to a drop in the number of child care workers since the pandemic. With fewer women working or looking for work, many companies are having to raise wages to compete for a smaller labor pool. These higher wages are then often passed on to consumers in the form of higher prices, thereby fueling inflation.
Swonk credits Kansas City Fed President Esther George for driving change at the Jackson Hole conference by inviting more women over the years, including Cook and Collins, to attend and participate in panels. Every year, about 130 influential central bankers and economists gather at Grand Teton National Park in Jackson Hole at the end of August to network and discuss challenges in the economy.
Although it has greatly diversified its leadership, the Fed has yet to solve one problem: a Hispanic American has never served on the Fed’s rate-setting committee – a complaint frequently voiced by Senator Robert Menendez , a Democrat from New Jersey. For that reason, Menendez voted against confirming Powell’s reappointment for a second four-year term as Fed chairman this year.
This year, Biden also named Michael Barr, a former Treasury Department official, as Fed governor, filling all seven board seats for the first time in nearly a decade.
Vincent Reinhart, a former Fed economist who is now at Dreyfus and Mellon, said it was unusual for the Fed to see so much turnover so quickly. Fed governors have staggered terms that must result in a vacancy every two years. The presidents of the regional mutuals have a renewable five-year mandate.
“This has to be the most dramatic change in Fed leadership in a year,” he said.
New members, including Barr, are more likely to favor lower rates to support the economy and hiring, Reinhart said. Yet for now, with inflation near a 40-year high, the Fed’s decision-making committee is unanimously deciding to raise rates sharply in an attempt to cool the economy and reduce inflation. There are few signs of dissent from this approach, so far.
Tim Duy, chief US economist at SGH Macro, suggested that the Fed is different from the Supreme Court in one important respect: the mere fact that a president has appointed several new members of the Fed’s board of directors does not affect not necessarily central bank policy-making.
The Fed is a more technocratic institution, Duy said, “where you’re more likely to see people’s opinions shift over time,” in response to changing economic data. At its July meeting, the 12-member Fed policy committee voted for a steep three-quarter-point rate hike — an unusually large increase.
Still, Reinhart said, if inflation were to come down significantly and appear to be under control and unemployment started to rise as Fed rate hikes squeeze the economy, some of Biden’s appointees might start advocating for the end of increases – or even to reduce rates.
The result could be less unanimity around Fed decisions, Reinhart said. Or Powell could end up pausing rate hikes sooner than he would like, to preserve the consensus.
“There’s a lot more opportunity for differences of opinion as we move through this rate hike cycle,” he said.