Black and Hispanic workers benefit from low interest rates the most, says a Fed economist

Accommodative monetary policy, such as low interest rates, benefits employment among all racial groups, but particularly among Black and Hispanic workers, according to new research.

In a paper published last month, Makoto Nakajima, an economist with the Philadelphia Federal Reserve, found that Black and Hispanic workers' higher economic sensitivity makes their unemployment rates more responsive to policy changes.

Nakajima argues that the positive impact of accommodative monetary policy on reducing unemployment, particularly for Black and Hispanic workers, outweighs the negative effects of increased inflation.

It supports previous research, which found a 25-basis-point rate reduction reduced the unemployment rate for Black workers by 0.34 percentage points more than for White workers.

“According to the conventional view, the monetary authority can only smooth business cycles mainly using policy rate adjustments, and long-term structural issues such as racial disparities cannot be dealt with by monetary policy,” Nakajima stated.

“My hope is that the paper provides a benchmark model to think about interactions between monetary policy and racial inequality.”

A corrective for inequality?

Nakajima’s analysis of monthly employment data from 1973 to 2021 examined four major racial groups: Black, Hispanic, White, and Asian.

It revealed stark differences in unemployment rates: 11.8% for Black workers, 8.8% for Hispanic workers, 5.5% for White workers, and 4.9% for Asian workers.

Despite these disparities, jobless rates for all groups moved in line with each other at different points of the economic cycle, suggesting macroeconomic factors impacted all groups similarly—although the baseline unemployment levels varied.

Investigating the underlying causes of higher unemployment among Black and Hispanic workers, Nakajima noted Black and Hispanic workers had higher rates of job separation and lower probabilities of finding new employment compared to White workers.

Their employment was also less stable, with more frequent transitions in and out of the labor force, leading to more volatile incomes.

Black and Hispanic workers earned significantly less than the most common weekly earnings level, with wages 19% and 26% below the median, respectively.

In addition, the average wealth of Asian, Hispanic, and Black households was 82%, 23%, and 21% of that of White households.

Nakajima also looked into how many households in each racial group could be classified as living “hand-to-mouth.” He found that almost half of Black and Hispanic households use up all their readily available financial resources in every pay period.

By incorporating this data into an existing model framework widely used by the Federal Reserve, he concluded an accommodative monetary policy benefits all racial groups, but in different ways.

In the case of Black and Hispanic workers, a drop in the unemployment rate and an increase in wages in line with a loose monetary policy led to a bigger relative rise in consumption for Black and Hispanic workers than those of other groups.

Meanwhile, white workers benefited more from the rise in asset prices that such a policy encourages, however.