Fed tackles inflation with its most diverse leadership ever

JACKSON HOLE: 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 who attended the event. It barely filled a single table.

Now, the “Women at Jackson Hole” happy hour draws dozens of female economists and high-level decision-makers, from the United States and overseas.

“I’m just glad that now there’s a line for the ladies’ room,” said Swonk, a longtime Fed watcher who is chief economist for the accounting giant KPMG.

It’s not just at Jackson Hole but also in the Fed’s boardroom where its leadership has become its most diverse ever. 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 have replaced.

Over time, economists say, a wider range of voices will deepen the Fed’s perspective as it weighs the consequences of raising or lowering rates. It may also help diversify a profession that historically hasn’t been seen as particularly welcoming to women and minorities.

“Broadly, that’s helpful,” said William English, a former senior economist at the Fed who teaches at the Yale School of Management. “There’s evidence that diverse groups make better decisions.”

The central bank, as it is doing now, raises its benchmark short-term rate when it wants to lower inflation, and reduces it when it wants to accelerate hiring. Such moves, in turn, affect borrowing costs throughout the economy — for mortgages, auto loans and business loans, among others.

On Friday, in his speech to the Jackson Hole symposium, Chair Jerome Powell stressed that the Fed plans further rate hikes and expects to keep its benchmark rate high until the worst inflation bout in four decades eases considerably — even if doing so causes job losses and financial pain for households and businesses.

Rhonda Vonshay Sharpe, an economist who is president of the Women’s Institute for Society, Equity and Race, said she welcomed the broadening of the Fed’s leadership. Sharpe said she’s “hopeful that a more diverse group of people will pay attention” to what the Fed does and aspire to high-level economic roles.

Colleges and universities, she suggested, should do more to encourage and prepare students for economic careers, including steering more of them to study mathematics.

The change at the Fed has been a rapid one, with three African Americans and three women having joined the central bank’s 19-member interest-rate committee just this year. (Under the Fed’s rotating system, only 12 of the 19 committee members vote each year on its rate decisions.)

The Fed’s influential seven-member Board of Governors, based in Washington, now includes two Black economists, Lisa Cook and Philip Jefferson, who were both nominated by President Joe Biden and were sworn in this May. They are the third and fourth Black people on the board. Governors get to vote on every Fed rate decision.

Biden also elevated Lael Brainard, a governor since 2014, to the board’s powerful vice chair position.

In addition, 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, formerly provost of the University of Michigan, became Boston Fed president this year. Bostic took office in 2017.

Just last week, Lorie Logan, a former senior official at the New York Fed, became president of the Dallas Fed. Five of the regional bank presidents are women.

Nela Richardson, chief economist at the payroll processing firm ADP, noted that the education and experience of the new policymakers are similar to their predecessors, with Cook, Jefferson and Collins all Ph.D. economists — an above-average proportion among new Fed officials, she said.

Richardson suggested that having more women in the Fed’s leadership is particularly important now, because many of the problems the central bank faces — including very low unemployment that is fueling wage increases and inflation — are related to women’s ability to join the workforce. Fewer women, particularly mothers of young children, are working now compared with pre-pandemic trends.

That shortfall is driven, in part, by a drop in the number of childcare workers since the pandemic. With fewer women working or seeking work, many businesses must raise pay to compete for a smaller pool of labor. Those higher wages are then often passed on to consumers as higher prices, thereby fueling inflation.

Swonk credits Esther George, president of the Kansas City Fed, 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. Each 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 the economy’s challenges.

Even as it has significantly diversified its leadership, the Fed has yet to address one issue: A Hispanic American has never served on the Fed’s rate-setting committee — a frequently voiced complaint of Sen. Robert Menendez, a New Jersey Democrat. For that reason, Menendez voted this year against confirming Powell’s reappointment for a second four-year term as Fed chair.

This year, Biden also named Michael Barr, a former Treasury Department official, as a Fed governor, filling all seven seats on the board for the first time in nearly a decade.

Vincent Reinhart, a former Fed economist who is now at Dreyfus and Mellon, said it’s unusual for the Fed to have experienced so much turnover so quickly. Fed governors serve staggered terms that are intended to result in one vacancy every two years. The regional bank presidents have five-year terms that can be renewed.

“This has got to be the most dramatic change in Fed leadership in one year on record,” he said.

The 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 policymaking committee is moving unanimously to sharply raise rates to try to cool the economy and lower inflation. There’s little sign of any dissent from that approach, for now.

Tim Duy, chief U.S. economist at SGH Macro, suggested that the Fed is unlike the Supreme Court in one important respect: Just because a president has nominated several new Fed board members doesn’t necessarily affect the central bank’s policymaking.

The Fed is a more technocratic institution, Duy said, “where you’re more likely to see people’s views evolve over time,” in response to changing economic data. At its July meeting, all 12 members of the Fed’s policy committee voted for a large three-quarter-point rate hike — an unusually large increase.

Still, Reinhart said, if inflation should fall substantially and appear to be under control and if unemployment began to rise as the Fed’s rate hikes squeeze the economy, some of Biden’s appointees could start to argue for an end to the increases — or even to cut rates.

The result might be less unanimity around the Fed’s decisions, Reinhart said. Or Powell might end up suspending rate hikes earlier than he would prefer, to preserve consensus.

“There’s a lot more opportunity for differences of opinion as we get longer into this rate-hiking cycle,” he said.