Raising the Floor for Everyone: Central Banking Beyond the Median

From adapting monetary policy to bring more people into the workforce, to more deliberate grass roots engagement, the Fed is increasingly listening and acting based on the needs of those too often left behind by economic growth.

Last year, the Federal Reserve hosted Fed Listens around the country to hear from the communities we serve. In San Francisco, participants—including employee groups, union members, small business owners, and community colleges, among others—delivered a clear message: longer economic expansions help those that often don’t benefit from growth. This includes more people in the workforce, raising standards of living, revitalizing communities, and creating the positive feedback loops that are the hallmark of a healthy economy.

The shocks of 2020 and the COVID-19 pandemic have emphasized the inverse of this lesson: those late to join the workforce during expansions are often the first to suffer in a downturn. In the face of this year’s dual health and economic crises, people have seen how low-income communities and, in particular, communities of color unequally shoulder burdens. These challenges are compounded by disparate access to the financial system. Unbanked populations have struggled to receive stimulus benefits in time to buy food and pay essential bills. Minority business owners saw much slower approvals of Paycheck Protection Program loans designed to support small businesses suffering during the pandemic. And those without equal access to financial services are more vulnerable to already elevated health and economic risks if they face longer delays or higher costs in receiving crisis relief.

Within this context, the Federal Reserve changed its monetary policy framework earlier this year. The Fed now acknowledges that we do not know how large a more inclusive and expansive workforce can grow with the right support. Recognizing this uncertainty helps policymakers become more comfortable allowing the economy to run a little hot, particularly when people are left out in the cold during a recession. The Fed has also added to a growing set of emergency liquidity tools developed after the 2008 crisis, offering credit to state and local governments and, for the first time in nearly 70 years, directly lending to nonfinancial companies.

For decades, the Fed and other central banks have typically made policy for and at the median—the middle-class saver and the mid-market business. These statistical concepts still help anchor our analyses, but they don’t tell us about the needs of those unserved by markets, for example those who can’t receive a stimulus payment through a traditional bank or can’t get loans because they lack a credit score. To achieve a more inclusive economy and financial system, the Fed is committed to thinking more deeply about how to deliver economic opportunity to everyone from the very bottom on up.

Central Bank of the Future: Reexamining Central Banks Role in Economic Inclusion and Inequality

In “Is the Federal Reserve Contributing to Economic Inequality?“, San Francisco Fed President and CEO Mary C. Daly stated, “Not every American gets the same chance at life, liberty, and the pursuit of happiness. And this difference in opportunity translates into differences in outcomes. It leaves us with two Americas: one for those who have, and one for those who have not. This is our shared reality, a reality we have to acknowledge and confront—as individuals, as institutions, and as a nation.”

One way the SF Fed is acknowledging and confronting economic inequality is through the Central Bank of the Future virtual conference. Co-hosted with the University of Michigan’s Center on Finance, Law & Policy, the conference will highlight the evolving role of central banks, like the Federal Reserve, in promoting economic and financial inclusion.

Central Bank of the Future
November 16–18, 2020


Attendees will examine the central bank’s three current functions: monetary policy, payment systems, and financial supervision, as well as experiences and lessons from international central banks, ranging from COVID-19 responses to explorations around central bank digital currencies.

What Does it Mean to Have an Inclusive Economy and Financial System?

By making inclusion a first-order objective, central banks can better promote economic opportunity for everyone across their work. But any conversation about solutions must begin with a definition of the problem. So what does “inclusion” mean?

One way to tackle the question is by flipping our typical approach on its head. In the past, regulators and policymakers have often focused on reducing the risk of exclusion. A bank supervisor may focus on preventing a bank from making discriminatory decisions—commonly known as “redlining”—to deny a loan. That safeguard does not necessarily mean the bank will expand lending to historically underserved communities to a level that reflects their needs. Indeed, over 40 years after the passage of the Community Reinvestment Act (intended to eliminate the harmful economic impact of redlining), black-owned small businesses are only half as likely as similar white-owned businesses to have obtained bank financing in the previous five years. That begs the question, do central banks need to take more positive actions to promote inclusion and reduce poverty?

Beyond the world of regulation, the private sector is thinking more expansively about what it means to be included, invoking broader concepts of health and wellbeing. For example, people don’t think in terms of access to bank accounts or digital payments—those are not their life goals. So why should policymakers promoting economic opportunity make delivery of a bank account the end goal? Citizens need tools that enable economic and social opportunity: a decent income to pay the bills; the ability to save and borrow for higher education, secure a home, or prepare for life after their working years; insurance for emergencies.

Some of these tools fall beyond the typical jurisdiction of a central bank, which lead to more questions, such as:

  • Should central banks offer new public utilities? For example, can universal access to affordable, safe, and fast payments drive inclusion?
  • In the future, should central banks restore growth by hosting universal bank accounts that receive automatic payments when the economy is under stress?
  • Can central bankers do more to influence the creation of products and services in the private sector that enable economic opportunity?

Promoting Inclusive and Responsible Innovation

Central bankers have long focused on the concept of responsibility out of fear that irresponsible innovation leads to predatory financial services or exclusion of vulnerable groups. Our fintech team, part of the Financial Institution Supervision and Credit group at the SF Fed, is broadening this traditional focus. This means thinking not just about responsibility to prevent harm, but also our power to effect positive change and include more people.

The role of central banks in promoting such innovation is still an open question. More inclusive, responsible innovation has to grapple with a number of tensions:

  • How do policymakers balance the potential for new technology to include under-served consumers and small businesses against the risk of new forms of predation and discrimination?
  • Can alternative underwriting incorporate information beyond traditional credit scores (which exclude an estimated 26 million “credit invisible” Americans) to expand access without introducing new forms of exclusion?
  • Will extending the regulatory perimeter to supervise new products and services promote both inclusive and responsible innovation, or does it involve tradeoffs?

Central Bank of the Future will reexamine central banks’ historical contributions to inequality, ask how we can build a more inclusive financial system to enable equal opportunity, and take up the debate of the central bank’s role in promoting inclusive and responsible financial innovation.

Registration for the conference is open until November 9. We hope you’ll join us!

Sean Creehan is the Fintech team lead for financial wellbeing and inclusion at the Federal Reserve Bank of San Francisco.

Image credit: ipopba via iStock.

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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.