The Fed Faces Criticism as It Wades Into Climate and Equity Issues
The Federal Reserve is proudly politically independent. That makes key discussions around climate change and racial inequity a balancing act.,
In mid-2019, Jerome H. Powell fielded a question from reporters that he often faced in those days: Were politics, and particularly a pressure campaign coming from Donald J. Trump’s White House to cut interest rates, influencing the Federal Reserve’s policy stance?
Mr. Powell, the central bank chair, tried as he had for months to convince the public that he and his colleagues were not bowing to the Republican administration. “We never take into account political considerations,” he said.
Nearly two years later, the Fed again faces warnings of politicization — but this time from Republican lawmakers who say it risks veering out of its lane as it focuses on what they portray as social priorities. Fed officials have ramped up their attention to climate change risks, racial economic equity and labor market inclusion, issues that many economists say are critical to the nation’s future, but which Washington often treats as the purview of the partisan left.
As the Fed has taken a more expansive view of how it should go about achieving full employment, stable inflation and financial stability — the loosely defined tasks Congress handed it — conservative economists and lawmakers have sent letters and made statements expressing worry that it will stray too far. One of the most prominent critics is Patrick J. Toomey, a Republican from Pennsylvania and a powerful member of the Senate Banking Committee, who has labeled research by Fed regional banks as “social studies essays.”
Such complaints don’t carry much immediate threat, with Democrats in charge of Congress and the White House and Republicans unable to rein in the Fed legislatively. But the mere accusation that the Fed is bowing to Democrats is a striking inflection point for a central bank that has often lived in America’s imagination as a friend of bankers and free-market enthusiasts. The timing is also surprising — given Republicans lead the institution.
There’s a reason for the shift, central bank watchers say: The Fed is trying to figure out how to do its job in a changing economy. Its new frontiers may align more with one party, but the Fed has spent its 107-year history evolving to fit the world around it.
“It’s not so much a give to political pressure as it is to economic reality,” Steven Kelly, a researcher at Yale’s Program on Financial Stability, said of the shift. That is particularly true when it comes to the focus on labor market equity, he said. “We’ve been overwhelmed with years of low inflation and underemployment, and I don’t think the Fed can ignore it any more.”
The Fed is in charge of guiding the speed of the economy by setting the price of money. It moves interest rates to get growth chugging during bad times or to prevent painful overheating during good ones. Its national and regional policymakers — 18 at present — have been appointed by the president or by business and community leaders and do their jobs independent of the White House and with only arms-length oversight from Congress.
The point of that autonomy is to keep political concerns, such as a presidential election, from preventing prudent policy.
Fed officials have guarded their independence fiercely, and to protect their status, they generally refuse to weigh in on heated political debates. But they have occasionally made exceptions for pressing economic issues.
Their opinions have at times been welcome to Republicans. Alan Greenspan, the Fed chair in the 1990s and early 2000s, famously endorsed George W. Bush’s tax cuts in 2001, for instance.
But that started to change after the 2007 to 2009 financial crisis, as Republicans sometimes accused Mr. Greenspan’s successors of being political. Ben S. Bernanke, who was initially appointed chair by Mr. Bush, was sometimes blasted for helping President Barack Obama by buying bonds to help the economy through a slow recovery. When Janet L. Yellen, the Fed chair from 2014 to 2018 and now the Treasury secretary, talked about skyrocketing inequality — saying that “it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history” — Republican lawmakers told her to get her “nose” out of places where it did not belong.
In the years since, the Fed has become more emboldened to discuss issues that have an economic impact, even when they fall into areas of partisan disagreement. Incumbent policymakers have pushed far beyond Ms. Yellen’s Fed’s quiet, often internal, efforts to look harder at inequality, labor market inclusion and climate change.
The central bank’s regional branches — which act of their own accord but communicate closely with their colleagues in Washington — have focused on opportunity and inclusive growth and held conferences on the economics of climate change.
And Mr. Powell, who was appointed to the Fed by Mr. Obama but elevated to chair by Mr. Trump, ushered in a new policy framework along with his colleagues last year. It clarified that the Fed saw its full employment target as “a broad-based and inclusive goal.” Mr. Powell said last week that the tweak was a nod to concerns about economic inequality at a time when low inflation rates had given the Fed leeway to foster a hotter job market that pulled more people in and pushed wages higher.
And when the pandemic spurred a financial meltdown last March and April, the Fed introduced programs to keep credit flowing not just to Wall Street but also to Main Street, including state and local governments. In the subsequent months, Mr. Powell gently but firmly pushed for more congressional spending to shore up the economy.
The Fed’s emergency efforts were initially welcomed by both parties, but ended in blowback that could have reined in its powers. Mr. Toomey held up stimulus negotiations in December 2020 to insert language that might have — in its original format — prevented the Fed from setting up programs that could help business or municipal borrowers without Congress’ support in the future. His office said the wording, which was eventually watered down, would protect the Fed from becoming a tool for Democrats.
But Mr. Toomey has continued to raise concerns that the Fed is on the brink of losing its neutrality. Late last month, he sent a letter to Mary C. Daly, president of the Federal Reserve Bank of San Francisco, that questioned her bank’s climate change and racial equality work.
“The Federal Reserve’s independence and careful adherence to nonpartisanship has allowed it to avoid being seen as a politicized body,” he wrote, going on to criticize central bank writings including a “racial equity primer” the institution published on Medium last year.
“The Federal Reserve may pursue mission creep or welcome itself to political capture,” he continued. “But such activities are inconsistent with its statutory responsibilities.”
Ms. Daly told reporters on Thursday that she would “welcome the opportunity to discuss” such matters with Mr. Toomey’s staff.
Other Republicans worry that, by drilling into climate risks, Fed supervisors will send a signal to banks that they shouldn’t lend to carbon-heavy industries. Influencing credit, they have said in letters, is not the Fed’s job.
And Michael Strain, an economist at the American Enterprise Institute in Washington, said he was concerned that the Fed’s focus on fostering equity — by driving down Black unemployment, for instance — could make it too hesitant to lift interest rates, allowing inflation to bubble up.
But Fed officials say the central bank is being pragmatic, not political. Ms. Daly regularly points out that understanding climate change risks to the financial system is important for bank regulators and supervisors. Mr. Powell said during a webcast Wednesday that the Fed sees such issues “through the lens of our existing mandates” — racial, gender and other disparities in economic outcomes “hold the economy back,” for example.
“Also I think we now realize that unemployment can go low for quite a long time without inflation being a problem — which will tend to help those groups,” he said.
Still, the Fed knows it’s in fraught territory. Mr. Powell avoids endorsing specific legislative packages. When Fed officials talk about inequality, they often discuss opportunity — a framing with more bipartisan backing.
There is a risk if the Fed is seen as a “quote unquote Democratic institution,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. It might lose support across political cycles, as with the Consumer Financial Protection Bureau, which is largely seen as a liberal project.
“The Fed always needs political support to do its job well and to have the autonomy it wants,” said Sarah Binder, a political scientist at George Washington University who studies the Fed’s politics. Pushback that led to reform has generally come from Democrats — who have forced it to focus more on employment and reined in its ability to help Wall Street — rather than Republicans, she noted.
And even now, some Democrats say the central bank could go further. Representative Rashida Tlaib, a Michigan Democrat, has pushed the Fed to do more to get cheaper credit to states and localities, for instance.
“The Fed has yet to be truly bold in protecting the real economy,” Ms. Tlaib said.
As the central bank tries to steer through the political moment, the fact that Mr. Powell is a Republican — and popular on Capitol Hill across party lines — may help ease the way.
“I have a lot of respect for Chairman Powell,” said Representative Andy Barr, Republican of Kentucky, who has at times worried about the Fed’s climate push. Still, Mr. Barr said, the regional banks risked “overstepping” by getting specific about social issues, inconsistent with the Fed’s long history of jealously guarding its independence.
“The Fed, by delving into these sticky political issues, is inviting the political interference they don’t want.”