During the contentious nomination process for Sarah Bloom Raskin, who subsequently withdrew her candidacy to serve at the Federal Reserve, the politicization of the U.S. central bank has come into question again.
Emre Kuvvet, an associate professor of finance at Nova Southeastern University, published a report on The Wall Street Journal that assessed party affiliation of economists at the central bank.
For economists at the Fed Bank of Cleveland, the Democrat-to-Republican ratio was 3:1. At the San Francisco Fed Bank, the ratio was 12:1.
He also learned that the Democrat-to-Republican ratio for senior economists and those in leadership positions was 22.25:1. But there is a substantial gap between older and younger Fed economists and their political leanings.
For Fed economists between 50 and 60 years old, the ratio is 6.5:1. However, for those 40 or younger, the party affiliation ratio is 20.3:1.
Kuvvet purported that the lack of intellectual diversity could intensify in the coming years, and this “should deeply concern American taxpayers and policy makers.”
“Because these economists have excellent job security, once a large group of younger members of one political type get in the door, they’re very difficult to get rid of and are likely to bring in new hires of a similar viewpoint,” Kuvvet wrote.
“The political homogeneity of Fed economists can’t help but undermine the legitimacy of their policy recommendations and analysis, both in fact and in the eyes of the public.”
Last week, Raskin ended her bid to become the institution’s vice chair for supervision, one of the world’s most powerful banking regulators. She slammed “relentless attacks by special interests” in dismantling her nomination.
Opponents were quick to pounce on her positions on climate policy and her criticisms of the energy industry, fearing that these stances could politicize her decision-making.
“The Federal Reserve Board is not an institution that should politicize its critical decisions,” said Sen. Joe Manchin (D-W. Va.) in a statement. “The time has come for the Federal Reserve Board to return to its defining principles and dual mandate of controlling inflation by ensuring stable prices and maximum employment. I will not support any future nominee that does not respect these critical priorities.”
The Fed’s New Mandates
Since its inception, Congress has given the central bank two chief mandates: price stability and full employment. However, in recent years, experts note, the Fed has concentrated its efforts on a broad array of other issues, such as climate change, economic inequality, race, and sex.
Throughout the Federal Reserve System, regional banks and officials have published a myriad of papers and delivered speeches homing in on these subjects. For example, the Federal Reserve Bank of New York published a report in January 2021 and later revised in March 2022, titled “Monetary Policy and Racial Inequality” (pdf). The Fed Bank of Minneapolis maintains a series called “Racism and the Economy.”
But some purport that this is not something that the monetary policymaking body has done on its own. Many politicians on both sides of the aisle have attempted to influence the Fed’s various mechanisms in recent years. When President Joe Biden was a candidate, he proposed making racial equity the Fed’s third mandate, with the goal being to inject liquidity into minority-owned businesses or companies that hire different ethnicities.
Advocacy groups have also tried to determine the makeup of the more than century-old institution. In 2018, Fed Up Coalition pressed for more racial diversity at the Federal Reserve following then-San Francisco Fed Bank President John Williams’ retirement.
For now, climate change appears to be the primary issue that it is studying. Its first comprehensive review will be released in 2023 that determines if rising temperatures could cripple the entire financial system. Until then, the Fed has also been urging financial institutions to comb through their portfolios and determine climate change risks.
That said, the politicization of the Fed is nothing new, experts argue. Any additional erosion of the group’s independence could threaten its effectiveness in combating genuine threats to the economy.
Christian Lundblad, a former financial economist at the Fed and current director of research at the Kenan Institute of Private Enterprise, warned in an op-ed that any diminished independence of the Fed would “impair its ability to operate when needed.”
“As a cautionary tale, academic research clearly documents a link between high inflation and the lack of central bank independence,” he stated.
A History of Fed Politics?
The Brookings Institution conceded in January that it is merely a “myth” that the organization is independent.
“Presidents use appointments to advance their agendas. The Fed is no exception, despite the myth that central banks like the Fed are ‘independent,’” wrote Senior Fellow Sarah Binder and River Capital CIO Mark Spindel in a report. “But given the often partisan Senate confirmation process, Democrats will likely need to hang together to get Biden’s picks over the finish line.”
Some historians have contended that this has been the norm since the 1930s, with the executive branch and the Federal Reserve leadership working in tandem to advance specific public policy objectives. Even former President Donald Trump made this argument when he first ran for the White House in 2016, telling the press that the Fed is a political institution.
When the real estate billionaire mogul uttered these remarks, he received lots of pushback, including from Minneapolis Fed Bank President, who dismissed the notion as ludicrous. Others referred to these comments as “dangerous” and “unhealthy.”
However, Thomas DiLorenzo, an economist and historian, has written about the partnership between the federal government and the central bank since the Great Depression.
“The Fed operates for the benefit of its executive branch controllers, the banking industry, and Fed employees themselves, at the expense of the rest of society which suffers from the economic instability it creates,” he said. “So-called ‘scientific socialism’ may have been the most absurd and destructive idea of the twentieth century, but it is nevertheless the guiding ideology of central banking.”
It has been widely documented that Fed Chair Marriner Eccles and President Franklin Delano Roosevelt “coordinated” monetary policy to advance the New Deal. When the U.S. economy suffered from stagflation in the 1970s, President Richard Nixon pushed Fed Chair Arthur Burns to flood the economy with liquidity to reverse the stagnant economy and sky-high inflation.
Most recently, when Trump was president, he pushed Fed Chair Jerome Powell and his colleagues for months to slash interest rates to support economic growth. After facing mounting pressure from the Trump administration, the Federal Open Market Committee (FOMC) cut the benchmark rate by 25 basis points to a range of 2 percent to 2.25 percent.
Because the Fed has employed extraordinary monetary policy measures since the 2008–2009 financial crisis, including an immense expansion of the balance sheet, politicians have been utilizing the central bank as a fiscal tool, analysts say.
“Once the demand for reserves is satiated, there is no limit, in principle, to how big the balance sheet or volume of reserves can be,” explained Charles Plosser, former president of the Federal Reserve Bank of Philadelphia, in a Cato Institute report. “A large balance sheet unconstrained by monetary policy is ripe for abuse. Congress and an administration would be tempted to look to the balance sheet for their own purposes, including credit policy and off‐budget fiscal policy.”
Experts anticipate even greater coordination between the federal government and the central bank with more focus on the Federal Reserve.