Raising the Benchmark Interest Rate Will Hurt the Job Prospects of Youth and People of Color

By Anne Price and Vishnu Sridharan

With the unemployment rate ticking down to 5 percent, it was no huge surprise that the Federal Reserve announced yesterday that it would raise the benchmark interest rate for the first time in almost a decade. The problem is, not everyone is experiencing the same employment gains and higher interest rates will hurt those most vulnerable in the labor market.

Black joblessness has always been twice as high as that of Whites. The Fed’s decision will also impact those coming into adulthood, 11.7 percent of whom are unemployed, at more than double the national rate. Joblessness among Black youth remains unconscionably high: 20.1 percent. We also have millions of missing workers who, due to weak job opportunities, are neither employed nor actively seeking work.

Low interest rates promote higher wages and full employment. Families are still reeling from the wealth losses of the Great Recession and a stable income is fundamental to rebuilding both their own economic position and investing in their children.

This is of urgent importance because, as research we co-authored shows, one of the largest predictors of economic success for young adults is whether or not they receive financial assistance from their parents, in particular, support for education. Another recent study found that eliminating student debt for households earning less than $50,000 a year would reduce racial wealth disparities by nearly 37 percent. As such, the Fed’s upcoming decision will seriously impact our children’s ability to fulfill their potential, and this is particularly true for Black and Latino families, who can rely on significantly less family wealth.

Even before the recession, in 2005, median net worth for white households was over eleven times median net worth of Blacks and Latinos. While the Great Recession impacted all families, it hurt those with the lowest level of assets the most. Latino families lost almost half of their wealth. Blacks lost a third or more.

One of the most important things parents can do in supporting their children’s economic future is helping to pay for their college or finance a down payment on a house. This is particularly pressing in light of skyrocketing tuitions to attend private and public universities across the country, as well as the post-recession tightening of the mortgage market. Deep losses to family wealth, especially to home-equity wealth, have drastically diminished the ability to assist children in these ways.

Our clearest finding confirms what most of us have suspected: individuals who receive financial support from their parents have a much higher income and net worth later on in life. Whites whose parents help them buy a home have more than three times the net worth of those who do not. Blacks who receive financial support for education have almost twice the income of their peers who have to fend for themselves. Most surprisingly, the Black-White disparity in college graduation disappears among those whose parents help them pay for it.

We also found that Black families contribute to their children’s education even when they have significantly lower levels of wealth than their White counterparts. The median wealth of Black parents who contributed to their children’s higher education was around $25,000, while the median wealth of White parents who did so was over $165,000. However, since white families have over 15 times the wealth of Black families, White children are more than twice as likely to receive financial support for higher education, with 34 percent of Whites receiving assistance compared to only 14 percent of Blacks.

Some worry that keeping interest rates low hurts savers, but raising them will hurt the next generation. We as a country need to pay much closer attention to the impact of our policies, especially on the rising majority of Black and Latino children. And that means keeping the benchmark interest rate as low as possible until we get to full employment.

Anne Price is the Director of the Insight Center for Community Economic Development’s Closing the Racial Wealth Gap Initiative.

Vishnu Sridharan is a member of the Experts of Color Network housed at the Insight Center for Community Economic Development.

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