Yellen Calls Widening Racial Wealth Gap ‘Extremely Disturbing’

  • Day two of hearings dominated by hot-button political issues
  • Fed report to Congress included study of recovery by ethnicity

Yellen: Widening Racial Wealth Gap 'Extremely Disturbing'

Federal Reserve Chair Janet Yellen called widening wealth disparity between races in the U.S. “extremely disturbing,” and warned that it could reshape consumption patterns in the future.

On the eve of the U.K.’s vote on whether to leave the European Union, the questions Wednesday from the House Financial Services Committee to the Fed chair were largely domestic and political, ranging from income inequality to burdensome bank regulation. Committee Chairman Jeb Hensarling, a Texas Republican, opened the hearing asking about the Fed’s legal authority to pay interest on excess reserves.

The Fed’s semi-annual Monetary Policy Report to Congress released Wednesday included a special section titled “Have the Gains of the Expansion Been Widely Shared?” That study concluded that blacks and Hispanics suffered the greatest proportional losses in full-time employment during the recession, and noted those workers’ share remains “significantly depressed” even as hiring has rebounded.

According to the report, by 2014, median household incomes for blacks had recovered only 88 percent of their 2007 level, while incomes for Asian, white, and Hispanic households had regained at least 94 percent of pre-recession levels.

“Racial and ethnic differences in income were sizable before the financial crisis and have only grown larger since then, with the median black household income at $40,000 in 2014, compared with $67,000 for white and $85,000 for Asian households,” according to the report.

Yellen has made prosperity for all a signature of her tenure as chair, remarking at her March 2014 swearing in that “each job that is created” helps someone be a better parent, to build stronger community and contribute to a more prosperous nation. She gave an entire speech on inequality that same year.

‘Complex’ Linkages

In her testimony, Yellen said research that looks at the links between inequality and growth are “frankly complex” and not well understood by economists. 

“One linkage is that higher income individuals may spend less of their income than lower income individuals so rising inequality may suppress the growth rate of consumer spending,” Yellen said in a question-and-answer exchange with Nydia Velazquez, a Democrat from New York. She said there also may be linkages in terms of opportunities for education and training that can have a long-run impact on growth.

“I think we are just beginning to understand,” Yellen said, adding that the widening disparities are “a very disturbing phenomenon.”

Watch Next: Why a Fed Rate Hike This Year Looks Ambitious

Before it's here, it's on the Bloomberg Terminal.