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Fed’s Bostic Calls For Higher Interest Rates, Economist Darrick Hamilton Says Rate Hikes Widen The Wealth Gap

Fed’s Bostic Calls For Higher Interest Rates, Economist Darrick Hamilton Says Rate Hikes Widen The Wealth Gap

interest rates hike

Images: Darrick Hamilton, professor of economics and urban policy at The New School, speaks at Making Education Work, July 25, 2018 (New America, https://www.flickr.com/photos/newamerica/) / Raphael Bostic, president and CEO of the Federal Reserve Bank of Atlanta, screenshot from Atlanta Fed video, https://twitter.com/AtlantaFed/status/1630960345824075777?s=20

In order to combat inflation and balance supply and demand in the economy, Atlanta Federal Reserve President Raphael Bostic said he thinks the Fed needs to raise its policy rate by 50 basis points to a range of 5-to-5.25 percent, and hold it there well into 2024.

“We must determine when inflation is irrevocably moving lower,” Bostic wrote in an essay published Wednesday, March 1. “We’re not there yet.”

The federal funds rate — the interest rate at which banks and other depository institutions lend money to each other — is 4.57 percent as of March 1, 2023. The national average 30-year fixed mortgage annual percentage rate for March 2 is 7.07 percent.

Interest rate hikes are promoted by the Fed as an inflation buster and vital for economic recovery, but they drive up the cost of borrowing for people who don’t have capital.

Higher interest rates, for example, price many people out of the housing market because a larger amount of the payment they need to buy a home — a major vehicle for wealth creation — is financed, said Darrick Hamilton, a professor of economics and urban policy and director of the Institute on Race, Power and Political Economy at The New School in New York City. 

The Black homeownership rate fell in 15 years from a peak of 49.7 percent in 2004 to 40.6 percent in 2019, according to Pew Charitable Trusts.

White Americans make up 60 percent of the population but own 84 percent of total U.S. wealth while Black Americans represent 13 percent of the population but hold 4 percent of the wealth, according to The Hamilton Project.

The Federal Reserve has a great deal of influence when it comes to regulating banks and lending without some of the political constraints that the federal government faces, Hamilton said during a Feb. 26 interview on All Things Considered.

“We’ve seen precedent as a result of this pandemic of the ways in which they can engage with banks in distributing money and resources and capital to the American people,” Hamilton said.

Hamilton cited a paper by Federal Reserve Board economist Daniel Ringo, who found that low- and moderate-income households are less likely to buy homes in response to a monetary policy shock than high-income households. Specifically, when mortgage rates go up by 1 percentage point, there is a 7.5 percent decrease in the share of homebuyers who are low- to moderate-income. The effects are particularly strong for first-time homebuyers from these income groups, Ringo found.

“I think he’s saying that the Fed’s idea is that if you raise interest rates, the prices will come down and that lower prices help everybody – that that’s not necessarily the case,” Hamilton said in reference to Ringo’s paper. “And I think he’s saying that the people who are left out stay out.”

The Fed can take more direct action to ensure more racially inclusive policies and ensure that capital and terms of finance are being distributed to promote greater access to low-income people, Hamilton said.

In his essay, the Fed’s Bostic said he will need to see higher interest rates put a dent in inflation, among other things, before considering reversing the course of monetary policy. These include:

  • Narrowing the gap between labor supply and demand
  • Higher interest rates more decisively affecting aggregate demand
  • Ongoing recovery in aggregate supply
  • Reduction in the breadth of inflation
  • Stable inflation expectations

In a Sept. 26, 2022 Washington Post podcast interview, Bostic addressed the Fed’s ability to raise awareness of the “constraints” that have reinforced persistent economic inequality in the U.S. These constraints include blocking home ownership — a “traditional pathway for wealth building for families throughout the history of this country,” Bostic said.

“Having the American public be aware of the realities that have prevented some from getting to those experiences, I think can help us have a richer conversation about things we might do to make sure that doesn’t happen moving forward,” Bostic said at the time.

Images: Darrick Hamilton, professor of economics and urban policy at The New School, speaks at Making Education Work, July 25, 2018 (New America, https://www.flickr.com/photos/newamerica/) / Raphael Bostic, president and CEO of the Federal Reserve Bank of Atlanta, screenshot from Atlanta Fed video, https://twitter.com/AtlantaFed/status/1630960345824075777?s=20