Minneapolis Fed President Says Systemic Racism Hurts the Economy

Two days after George Floyd died in police custody and as videos of his killing circulated on social media, the president of the Federal Reserve Bank of Minneapolis did something unusual for an official in his position: He sharply and publicly denounced law enforcement actions.

The Fed is a famously tight-lipped institution when it comes to social issues, and most of its officials are not active on social media, so it was notable when the bank’s president, Neel Kashkari, posted on Twitter that the killing indicated “institutional racism that is actively taught and reinforced.”

His colleague Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, followed two days later with a post stating that “hate thrives when people stay quiet.” And Raphael Bostic, the president of the Atlanta Fed and the Federal Reserve’s only black policymaker, last week criticized systemic racism.

The comments are the latest stage in a long-running evolution at the Fed, which in recent years has increasingly weighed in on societal concerns with an economic bent — like wealth and income inequality and job market disparities.

In an interview, Mr. Kashkari, who joined the Fed in 2016, said that he believed it was important to use his platform to speak up, and that race in America tied back to foundational economic issues, like who had the opportunity to obtain a good education or who had the resources to build wealth. Racial disparities, he said, are holding back workers from reaching their full potential.

Mr. Kashkari, a former assistant secretary in the Treasury Department who oversaw the Troubled Asset Relief Program, the $700 billion bailout that Congress passed in 2008, also discussed the lessons the Fed was taking from the financial crisis as it rushes to save a pandemic-damaged economy, and what dangers might lie ahead in the banking sector. The following is a partial transcript of that conversation on Friday.

JEANNA SMIALEK, Fed reporter for The New York Times: You wrote on Twitter that the fact that police treated George Floyd so violently while being recorded “indicates institutional racism that is actively taught and reinforced.” That is an unusually strong remark for a Fed president to make on a social issue. What prompted you to express your views?

NEEL KASHKARI: It was just an honest expression of my reaction. It had been in the news for the past day or so, and I’d seen it, and I’d seen other footage of black men being killed by the police, and I was struggling to figure out — why did this feel so different to me? And it felt so different to me because you could see, there were witnesses standing around the police officers and the police officers didn’t care. They were so confident in what they were doing, they were sending a message, that we’re not doing anything wrong.

I think I’ve just learned — if we don’t speak out about what we’re seeing, if everyone doesn’t speak out about what they’re seeing, then nothing changes.

SMIALEK: Do you think it’s the Fed’s place to weigh in on such matters, and, if so, why?

KASHKARI: I don’t think it’s the Fed’s place to weigh in on partisan political issues or picking sides Republican versus Democrat. But I live in Minnesota, I’m a voter in Minnesota, our employees live here. We live in our community, and if there are really pressing issues in our community, I think we have a responsibility to speak up. We’ve launched the Opportunity and Inclusive Growth Institute; we’ve already made a commitment that we’re going to do what we can to improve economic outcomes for all Americans. We’ve already said this is going to be an important issue for us, and then you have George Floyd being murdered in Minnesota itself — the epicenter of this — I think it’s totally appropriate for us to weigh in.

SMIALEK: Do you think institutional racism hurts the economy, and do you see that playing out in Minneapolis?

KASHKARI: If white children in Minneapolis had the educational attainment that African-American children have, this problem would have been solved a long time ago. I think racism is an undercurrent of the status quo, and then, you have huge chunks of our population who are not getting a good education, who do not have good job opportunities — it absolutely holds our economy back.

There are big chunks of our population whose innate human capital is basically being squandered because they are not getting an education that enables them to take advantage of their natural talents and gifts. That not only hurts them, that hurts all of us. It hurts our society and our economy.

SMIALEK: What role can the Fed play here?

KASHKARI: If we can use our economic research capabilities to analyze issues using the best data and evidence possible, and put forward policy recommendations that other policymakers can implement, that’s an important contribution for us to make.

The Fed has a big role to play, even if it’s outside of monetary policy, because people trust us as honest researchers.

(Mr. Kashkari has pushed for legislation in Minnesota that would make quality education a right in the state. The Minneapolis Fed is also conducting an analysis of what the impact would be of a local minimum wage increase, he said.)

SMIALEK: This isn’t the only thing on your mind right now, clearly. There’s a debate at the Fed right now about whether banks should be forced to conserve more capital as the pandemic continues, including halting dividend payments. You’ve been outspoken that they should. Why?

KASHKARI: The longer this crisis goes on, the more likely the losses roll up into the banking sector. When the virus crisis flared up, we didn’t know — maybe it will only be a two month crisis.

It seems very clear now this is a year, 18 month, even two-year journey that we’re on now until the economy fully recovers.

(Mr. Kashkari has called for a suspension to bank dividend payouts, and believes that banks should raise equity instead. While the Fed board in Washington could stop banks from making payouts, it has so far chosen not to. Officials have suggested that could change after the results of annual bank stress tests are reported next Thursday.)

SMIALEK: The Fed is also a cornerstone of the government’s relief program for businesses and local governments. What lessons did you learn during TARP that should carry through to the current moment?

KASHKARI: We have to err on the side of being generous.

We tried to be very targeted in our assistance, helping homeowners who were deserving, who needed only a little bit of help. It ended up that we didn’t help very many homeowners and the housing correction was more severe than it needed to be. It’s better to be generous in your assistance, even if that means you help people who are quote-unquote not deserving.

SMIALEK: Will more be needed, especially on the fiscal side, and if so, what?

KASHKARI: I think more will be needed on the fiscal side.

Many of these jobs are not going to come back for a long time. Those workers who have been laid off are going to need to be able to pay their bills.

More focus on unemployment assistance for those jobs that are not coming back anytime soon, I think that’s going to be critical. Not only for the families themselves, but also for the economy as a whole. If people can’t pay their rent, can’t pay their mortgage, that’s how things start to spill over.

SMIALEK: When the economy does rebound, should the Fed pay attention to racial unemployment rates when it thinks about when to raise rates?

KASHKARI: I don’t think we have the ability to say “we’re going to target a reduction in this type of inequality through interest rates.” But I do think paying attention to these disparities gives us better insight into labor market slack in general.

“The fact of the matter is — the Fed raised rates too quickly and too soon,” Mr. Kashkari said, referring to increases that began in late 2015 as the central bank tried to make sure inflation did not rocket higher as the jobless rate fell. “We thought there was less slack out there than in fact there turned out to be. We have to learn from that. And how were we surprised? It turned out that there were more minorities who wanted to work, and more old people who wanted to work, than our models anticipated.”

“We need to understand the disparities,” he said.