A central bank should not be distracted by a political agenda
On Wednesday, June 15, House Democrats decided to disregard rampant inflation and a bleak economic forecast in favor of granting the Federal Reserve substantial power outside the scope of its dual mandate. The passage of the Federal Reserve Racial and Economic Equity Act is not only an astounding political move at the worst possible time, but it also highlights the radical left’s commitment to a long march through our institutions. They seek to use the Federal Reserve to advance their social justice warrior agenda.
To keep the Federal Reserve’s core monetary policy function from the taint of political agendas, the time has come to bifurcate the Fed and separate its role as a prudential regulator. Americans need monetary policy fully dedicated to addressing 8 percent inflation and an economy on the verge of recession. The whims of political opinion should not sway the Fed’s focus away from its dual mandate of stable prices and high employment. Unfortunately, Democrats are using every layer of government to pursue their environmental, social, and corporate governance (“ESG”) agenda, which is exactly what we saw with the Federal Reserve Racial and Economic Equity Act.
What is ESG? It depends on who you ask since ESG is in the eye of the beholder. There’s no definitional limitation to the concept, which is precisely why ESG has become a populist rallying cry for Democrats to try to appease different voter groups. Climate change, board diversity, income equality, abortion rights, gender identity, workforce ethnicity, labor practices, and voting rights are just some of the hot topics commonly lumped into the ESG bucket. The ambiguity is strategic and intentionally flexible to allow its use as a political weapon.
The Fed, an independent agency spared from the congressional appropriation process, provides left-wing activists with an ideal vehicle for implementing their ESG agenda. On the topic of climate change, for example, the Fed itself has openly stated that it believes its “financial stability monitoring framework is flexible enough to broadly incorporate many key elements of climate-related risks.”
Unfortunately, this broad interpretation of power appears to be held by more than just bureaucrats at the Federal Reserve. The Federal Reserve Racial and Economic Equity Act goes further than addressing climate change by, among other things, directing the Fed to: address racial disparities in wealth, income, and employment; evaluate depository institutions based on their diversity practices and require companies to report on their diversity practices; collect information on credit applications from small business owners who self-identify as LGBTQ; and create a federal office that would deploy people posing as potential buyers to test creditors’ compliance with anti-discrimination law.
None of these directives combat inflation, which 66 percent of Americans expect to get even worse in the coming year. The Fed MUST stay focused on its dual mandate—which is why I re-introduced the Federal Reserve Regulatory Oversight Act earlier this year with a Senate companion sponsored by Sen. Thom Tillis (R-N.C.). This bill would simply separate the prudential regulatory functions from the central bank within the Fed’s structure. It would ensure that 1) our central bank can combat inflation without being distracted by implementing a purely political agenda, and 2) all monies used to fund the prudential regulatory function of the Fed are subject to the appropriations process.
Under current law, the Fed internally funds itself through interest earned on the securities it holds along with the fees it receives for services provided to depository institutions. The Federal Reserve Regulatory Oversight Act would adjust this arrangement to prohibit expending any of these funds towards “non-monetary policy-related administrative costs,” including costs associated with supervisory and regulatory functions. These functions would consequently be funded through the congressional appropriations process and thus directly subjected to congressional oversight. The central bank would then operate without political interference dominating its regulatory and supervisory functions.
Essentially bifurcating the Fed into two agencies has become more necessary as Congress and Fed bureaucrats have continuously tried to leverage the agency’s powers to pursue a political agenda. Now is not the time for that. Now is the time to protect and preserve the U.S. dollar and the broader economy. While some, including myself, have questions or criticisms regarding the U.S. monetary policy in recent years, we should all agree that subjugating the dual mandate and leveraging the Fed as a political weapon will not help America during these trying times.
Warren Davidson represents Ohio’s 8th District and is a member of the House Financial Services Committee, ranking member of the FinTech Taskforce, and founder of the Sound Money Caucus.