The Fed has a forgotten role — and it will be critical in getting the US economy ‘running on all cylinders’

U.S. Federal Reserve Chair Janet Yellen (L) watches a welding student (not pictured) as she tours City Colleges of Chicago, College to Careers Program in Advanced Manufacturing, at Daley College in Chicago, March 31, 2014.

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U.S. Federal Reserve Chair Janet Yellen (L) watches a welding student (not pictured) as she tours City Colleges of Chicago, College to Careers Program in Advanced Manufacturing, at Daley College in Chicago, March 31, 2014.
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REUTERS/John Gress

    Federal Reserve officials are paying increasing attention to the central bank’s community development activities, which focus on real world economic issues. James Bullard, St. Louis Fed President, told us these issues are “very important to the macroeconomy.” The effort comes as the Fed marks a changing of the guard, with President Donald Trump appointing Jerome Powell as Fed chair.

It’s not setting interest rates, or regulating the big Wall Street banks. Those are crucial tasks, and the primary function of the US central bank.

But for Patrick Harker, president of the Federal Reserve Bank of Philadelphia, meeting people in his district and learning their stories is the most fulfilling part of the job, Harker said in a recent speech.

Harker, who has made an effort to engage with community leaders in his district since taking office in July 2015, was addressing the Investing in America’s Workforce conference earlier this month. The event was an effort to bring together non-profits, the private sector and Fed experts to address outstanding concerns about the labor market – including those beyond the scope of monetary policy.

“One of the most impactful parts of being a Fed president [is] getting to see the real life implications of the data that we all view at the Fed on a daily basis and how it translates, into the lives of people in our district and around the country,” Harker said. “Talking to employers and job seekers and educators just resonates more than a line on a graph.

Talking to employers and job seekers and educators just resonates more than a line on a graph.

Harker, who said he grew up in a family of pipe fitters, knows on a personal level “how those jobs, those careers, gave people solid, middle-class lives, even without a college degree. I’m the result of that. I’m the beneficiary of a time and a place that offered a host of railways to the terminus of financial security.”

His comments come as the Fed marks a changing of the guard, with President Donald Trump appointing current Fed governor Jerome Powell to replace Janet Yellen as Fed chair. Powell will have to face important social issues in the US economy like widening income inequality and job polarization, both which fit well into the mandate of the Fed’s community development divisions.

“The Fed has a unique Community Development function that seeks to mobilize ideas, networks, and approaches that address a wide range of community and economic development challenges,” Powell said in an April speech.

The Federal Reserve System, comprised of the Washington-based board and 12 district banks, recently released a report called “Investing in America’s Workforce: Report on Workforce Development Needs and Opportunities.”

The research, said Harker, was driven by a recent modification in the Community Reinvestment Act, for whose enforcement the Fed is responsible, that “allows banks to include workforce development as an investment opportunity.”

Regional Fed banks lead the way

Several regional Fed banks, and the central bank’s board itself, have ramped up efforts to deal with issues like low labor force participation, inequality, low-paying and erratic work.

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 labor markets and how bifurcated they are.”

He worries about a growing split between “this professional class of people that go to college and get good jobs and then another, kind of underclass where things don’t go so well, they have less opportunity, they get less good jobs, they are out of the labor force more often,” Bullard said.

“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.”

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.

The Community Reinvestment Act dates back to the 1970s and was aimed at combatting redlining and exclusion of poorer US communities and neighborhoods.

Still, Bullard, said, while the function “has been expanded some during the time that I’ve been president … if you look at the total budget we’re spending a very small amount on this.”

Bullard sees two key roles for the Fed – “a convener” between workers, non-profits, lenders and employers, as well as a reliable source for relevant research and data.

“One of the best things that we can do is get everybody in the room at the same time and all talking to each other. We can’t put money in directly but we can pair people up and get them thinking,” he said.

Meanwhile, the Philly Fed’s Harker worries the central bank will not be able to achieve its dual mandate of low and stable prices and full employment without at least helping to address other underlying problems in the economy.

“Ultimately, we’re creating the conditions for economic growth. But those conditions won’t be as fertile if we can’t fill the jobs that are out there now, not to mention the ones coming in the future,” he said. “The US can only reach its potential when the needs of both business and the labor force are addressed in stronger alignment. So, we took a deep dive into what’s happening now and what we need to plan for the future.”

He also highlighted “barriers that aren’t related to skills, like addiction, incarceration, child-care costs. There are also logistical impediments; in the case of housing and insufficient transportation – the simple consequence of place.”

Another issue is the quality of jobs, not just their quantity.

“While we’re essentially at the point of maximum employment – in its simplest terms, if you want a job, you can get one relatively easily – that doesn’t mean it’s a good job, or that it pays a living wage, or that it comes with the benefits that can be truly family-sustaining,” Harker said.