The Federal Reserve faces criticism from lawmakers and others over its record on diversity at the same time the central bank is highlighting the economic outlook for minority groups.

Several Democrats on the Senate Banking Committee questioned Fed Chairwoman Janet Yellen on Tuesday about the selection process for regional Fed bank presidents, echoing the concerns of advocacy groups who have said the system should be more open and allow more public input.

The 12 regional bank presidents are appointed by regional boards, subject to approval by the Washington, D.C.-based Fed board of governors. As heads of regional Fed branches, they are expected to keep their fingers on the pulse of their local economies and participate on decisions about interest rates. Just two of the current presidents are women and none are black or Hispanic. The last black president stepped down in 1974.

Sen. Elizabeth Warren (D., Mass.) criticized the selection process, saying Washington officials represented little more than a rubber stamp. Earlier this year, Fed governors signed off on the reappointment of most bank presidents until 2021 “without any public debate or any public discussion,” she said.

“If you’re concerned about this, why didn’t you use either of these opportunities to say enough is enough. Let’s go back and see if we can find qualified regional presidents who also contribute to the overall diversity of the Fed’s leadership?” Ms. Warren asked.

“It just shows me that the selection process for regional Fed presidents is broken,” retorted Ms. Warren, calling on Congress to consider changing the process.

The Center for Popular Democracy, a left-leaning advocacy group, has been pressing the Fed for months to increase the diversity of its leadership, as have many Democrats on Capitol Hill who signed onto a letter from Ms. Warren to Ms. Yellen on the matter last month.

Presumptive Democratic presidential nominee Hillary Clinton has also weighed in. Her campaign released a statement saying the Fed “needs to be more representative of America as a whole.”

In a June 13 response to the lawmakers’ letter, Ms. Yellen acknowledged “there is still work to be done” on diversity within the Fed ranks “and I assure you that workforce diversity remains a priority for the Federal Reserve.”

In her prepared testimony Tuesday, Ms. Yellen stressed the need to ensure that the gains from the economic recovery are widely distributed.

She noted that blacks and Hispanics are still suffering some of the effects of the recession in more pronounced ways than other groups. Black and Hispanic workers still face higher unemployment rates than the workforce as a whole, she said.

“It is troubling that unemployment rates for these minority groups remain higher than for the nation overall, and that the annual income of the median African-American household is still well below the median income of other U.S. households,” Ms. Yellen said.

Diverging economic circumstances between white and black households predate the recession but the gaps widened after the financial crisis and have only barely narrowed in the recovery.

A Fed report released alongside Ms. Yellen’s testimony found that black households, which saw their median incomes fall 16% during the recession, are only 88% of the way back to prerecession levels. White households, by contrast, saw incomes fall only 8% and are already back to 94% of prerecession levels, the report said.

It is rare for the Fed to address the economic conditions for individual demographic groups. The central bank’s congressional mandate requires that it seek to hold down unemployment and keep inflation stable for the country as a whole. In the past, Ms. Yellen has said she was sympathetic to the economic troubles of minority groups but stressed the Fed’s options for addressing them were limited.

Ms. Yellen’s comments Tuesday suggest a rising recognition within the Fed that the racial gaps in the economy are becoming more pronounced and that there is a role for monetary policy to play in shrinking those gaps.

“It’s important for us to be aware of those differences and to focus on them as we think about monetary policy and work that the Federal Reserve does in the area of community development,” she said.

Ms. Yellen is set to address the House Financial Services Committee on Wednesday and could face many of the same questions.

By  David Harrison

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