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.
For economists at the Fed Bank of Cleveland, the Democrat-to-Republican ratio was 3-to-1. At the San Francisco Fed Bank, the ratio was 12-to-1.
He also learned that the Democrat-to-Republican ratio for senior economists and those in leadership positions was 22.25-to-1. But there’s 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-to-1. However, for those 40 or younger, the party affiliation ratio is 20.3-to-1.
Kuvvet purported that the lack of intellectual diversity could intensify in the coming years, and this “should deeply concern American taxpayers and policymakers.”
“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 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.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.
A History of Fed Politics?
The Brookings Institution conceded in January that it’s 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 a lot 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 20th 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.
“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.