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Biden's wrong to ask the Fed to target racial gaps

Democratic presidential candidate former Vice President Joe Biden

Democratic presidential candidate former Vice President Joe Biden smiles at a campaign event at the William "Hicks" Anderson Community Center in Wilmington, Del. on July 28, 2020. Credit: AP/Andrew Harnik

Joe Biden wants to change the way the Federal Reserve is governed for the first time in four decades.

In 1977, Congress set "maximum employment, stable prices and moderate long-term interest rates" as the central bank's goals. It's called the dual mandate, since everyone forgets the bit about interest rates.

In a recent speech, Biden mentioned the goals of low unemployment and price stability and then said, "Under my plan, I believe the Fed should add to that responsibility, and aggressively target persistent racial gaps in jobs, wages and wealth." According to The Washington Post, his "campaign later said Biden has not explicitly embraced a third mandate for the Fed dictating that it consider racial justice in its policies, but that seeking one in the future is an option."

Let's hope that Biden continues to back off from the clear import of his words. Adding another statutory mandate is the wrong way to go about improving monetary policy for Americans of any color.

It's true that monetary policy has an influence on racial gaps. Mistakes by the Federal Reserve in 2008 — signaling tighter money ahead as the economy weakened, and starting to pay interest to banks on their excess reserves — increased the severity of the Great Recession. The recession, in turn, made the wealth gap worse.

But the Fed's power to affect these gaps is more limited and indirect than its power over, say, inflation. It could use its existing tools, such as asset sales and purchases, to achieve zero-percent inflation if it decided this were the right policy. There's no conceivable monetary policy that would set the differential between Black and White rates of asset ownership at zero.

If monetary policy were being conducted in a way that stabilized the business cycle as much as possible — which is the rough idea behind the dual mandate — we wouldn't want to alter that policy in order to reduce racial gaps. Doing so would be a deliberate choice to make booms and busts bigger. It's hard to see how the Fed could do that in a way that had a very high probability of raising racial minorities' incomes, employment and wealth in the long run.

The saving grace of an attempt to change the mandate as Biden suggests is that the Fed's governors would probably just say that whatever they were planning to do anyway, on macroeconomic-stabilization grounds, is also the best way they can determine to promote racial equality.

What Biden and other politicians could usefully do is focus their attention on the Fed's basic stabilizing task.

When President Barack Obama took office in 2009, he seemed to believe that the Fed had done all it could to combat the recession, even though it had refrained from making such expansionary moves as ending the payment of interest on reserves. And so it was not a priority of the administration to put appointees at the Fed who would move policy in a more accommodative direction. It wasn't a priority to make any Fed appointments at all.

The Fed spent much of 2015 advertising its eagerness to tighten monetary policy, even as inflation remained below the central bank's target. This policy mistake may have helped to sink the Democrats in the 2016 election.

If Biden wins the election, the economy may well need a more dovish Fed policy for the first years of his term. Biden would have opportunities to add mainstream economists who agree with that approach to the central bank's board. Avoiding the last Democratic president's mistake on this question would do more to help Americans, especially those with less money, than changing the Fed's mission statement.

Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.