“…neither the warming of the earth’s temperature nor severe weather events are a threat to the stability of the financial system. Experience bears this out.”
Sen. Pat Toomey, the top Republican on the Senate Banking Committee, expanded his review on political activism from regional Federal Reserve Banks.
Toomey requested documents from the banks in Atlanta, Boston, and Minneapolis in regards to the joint Racism and the Economy series.
Toomey launched the review of Mission Creep in March after he discovered “social research of a ‘bitterly partisan nature’ at the San Francisco Fed.”
“I am writing regarding the sudden pivot of the Federal Reserve Bank of San Francisco (FRBSF) toward publishing politically-charged research on environmental, social, and governance (ESG) topics like climate change and racial justice,” Toomey wrote to FRBSF President Mary Daly.
The Federal Reserve’s independence and careful adherence to nonpartisanship has allowed it to avoid being seen as a politicized body in the course of carrying out its dual mandate of maintaining price stability and full employment. However, FRBSF and other regional Federal Reserve Banks have written social studies essays dealing with, among other things, health insurance and essential service workers in New England (something for which we have a Department of Labor, Equal Employment Opportunity Commission, and National Labor Relations Board); the relationship between race, type of work, and Covid-19 infection rates (something for which we have a Department of Health and Human Services); overcrowded housing (something for which we have a Department of Housing and Urban Development); and guidance that people “may have privilege based on [their] racial identity, job, and other factors” and should, if they “are white, practice finding ways to center and elevate the voices and experiences of people of color, without burdening them to educate on racial equity or validate your learnings.”
Federal Reserve Continues Social Justice
Now Toomey expanded the review to include Atlanta, Boston, and Minneapolis with the series Racism and the Economy:
Racism forms the foundation of inequality in our society, and it threatens our economy and limits economic opportunity for people of color. All 12 District Banks of the Federal Reserve System are partnering to highlight the implications of racism in the United States and identify solutions.
The Reserve Banks will host a series of virtual events to examine the ways in which structural racism manifests in America and advance actions to dismantle structural racism.
Toomey wants documents and briefings about the series by June 7. From the Minority Press Release released on Monday (their emphasis):
Pointing to the regional banks’ joint ‘Racism and the Economy’ series, Senator Toomey wrote in letters to regional bank Presidents Neel Kashkari (Minn.), Eric Rosengren (Boston), and Raphael Bostic (Atlanta):
“Of course, racism is abhorrent and has no place in our society . . . . I recognize the interest in studying economic disparities along demographic lines, such as race and gender. However, this subject matter is fraught with ideological assumptions and interpretations, and the work and analysis of the [Minneapolis/Boston/Atlanta] Fed seems heavily laden with political and value judgments.”
As the Ranking Member noted, the Fed’s mission and statutory mandate is nonpartisan, independent, and restricted to monetary and regulatory policy duties. However, the Fed has recently been engaging in mission creep, devoting federal resources to political advocacy.
“Whether or not this is your personal view, I would remind you that only Congress has the authority to reform the Federal Reserve or modify its statutory mission. Moreover, I would caution you on the reputational damage being inflicted on the [Minneapolis/Atlanta/Boston] Fed and the Federal Reserve as a whole by pursuing a highly politicized social agenda unrelated to monetary policy.”
Senator Toomey first expressed concern on the “sudden and alarming” shift by regional Federal Reserve Banks towards work of a “bitterly partisan nature” in March, requesting documents and a briefing from the San Francisco Fed.
Toomey brought up the activism to Federal Reserve Vice Chairman for Supervision Randal Quarles at a hearing on Tuesday. He reminded Quarles that the Federal Reserve must preserve its “credibility and independence by focusing on its narrowly-defined monetary and regulatory missions-not issues such as global warming or racial justice activism.”
The Fed’s recent actions raise concerns that it’s losing sight of this constraint. Consider its increasing focus on the supposed risks of global warming to the financial system. In March, John Cochrane, a distinguished economist at Stanford, powerfully argued before this Committee that “climate change poses no measurable risk to the financial system.”
Put simply, neither the warming of the earth’s temperature nor severe weather events are a threat to the stability of the financial system. Experience bears this out. In the last 11 years—a time period that included four of the five costliest hurricanes in U.S. history—we haven’t found one bank failure caused by any weather event. In fact, we’re not aware of any bank failure in the modern era due to weather.
Nevertheless, the Fed recently joined the Network of Central Banks and Supervisors for Greening the Financial System. The network’s stated aim is to use financial regulation to “mobilize mainstream finance to support the transition toward a sustainable economy.” In other words, to direct credit away from the fossil fuel sector.
Such actions are inconsistent with the Fed’s mandate and authorities. As Chair Powell himself has said, “society’s broad response to climate change is for others to decide—in particular, elected leaders.”
Toomey worries the concentration on social justice “almost guarantees that it will be behind the curve if inflation becomes problematic and persistent”:
First, the Fed has announced it will allow inflation to run above its two percent target level. Second, the Fed insists that the inflation we’re experiencing now is transitory. But you can only know something is transitory when it comes to an end. What if it does not come to end?
]Another side effect of the Fed’s asset purchases is the regulatory implications of such an abundance of reserves in the banking system. When the Fed purchases Treasuries or agency securities, the aggregate level of reserves rises correspondingly. As a result, reserves in the banking system have risen by over $2 trillion dollars and bank leverage ratios have experienced pressure from absorbing these riskless reserves that the Fed is creating.
Last year, the Fed recognized this problem and issued temporary relief that allowed banks to accommodate a surge of reserves. That relief has expired and there are signs that it was needed. The Fed recently stated that it will address this problem on a permanent basis. I urge you to do so swiftly.
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