President Biden recently promised in these pages not to interfere with the Federal Reserve. Yet last week he endorsed a House bill that would add racial equity to the Fed’s dual mandate of price stability and full employment. How does the White House square this contradiction?
The House bill passed last week 215-207 with little media notice. But it deserves attention because it reveals how the Biden Administration and Democrats plan to politicize monetary policy and financial regulation.
Recall that Candidate Biden advocated making reducing racial disparities a third monetary mandate. You have to wonder if one reason the Fed was slow to tighten policy was because the central bankers agreed with him. Several Federal Open Market Committee (FOMC) members promoted the goal of “inclusive” employment even as inflation began to creep up.
Now House Democrats want to codify racial equity as part of the Fed’s mandate. Their bill would require the Board of Governors and FOMC to “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.”
The bill directs the Fed to include race in monetary policy, the operation of payment systems, and the supervision of banks and non-banks deemed by the Financial Stability Oversight Council to be systemically important.
Central bankers have a hard enough time balancing full employment with stable prices. Adding a racial equity mandate could cause their models to go catawampus. How small would the black-white unemployment gap have to be, and how high would prices have to climb, before the Fed considers raising interest rates?
The pandemic has been an informal experiment in this triple mandate. It hasn’t worked out for minorities. The Fed’s accommodative policies have driven up asset prices, mainly benefiting relatively well-to-do people who own homes and stock. Now a recession may be in the offing, which would compound the harm inflation has done to minorities.
Requiring the Fed to incorporate race into bank (and potentially non-bank) supervision would likewise contradict its duty to protect financial stability. Would the Fed reduce the capital that banks must hold against loans to minorities? Would banks be graded based on the number of loans they make to minority businesses?
Easing underwriting standards to boost minority credit and homeownership could cause defaults and foreclosures to spike in a recession, as happened during the last financial crisis. Democrats would then accuse banks of predatory lending.
Most banks are trying to increase lending to minority communities, yet the bill would require financial regulators to rate banks on diversity and inclusion. Minority-owned banks would be exempt from these exams and automatically get the highest rating. The bill also instructs federal agencies to move deposits to minority-owned banks.
Such racial favoritism almost certainly violates the Constitution. So potentially does the bill’s requirement that public companies disclose to the Securities and Exchange Commission the racial, gender identity and sexual orientation of directors and executives.
Administrations don’t have to take a position on every bill, so the Biden team’s decision to support this one is revealing. Yet the White House statement glossed over almost all of the bill’s substance. The bill would ensure that all Americans “benefit fully from our Nation’s economic success,” the White House says.
The bill would instead politicize monetary policy and financial regulation when the Fed’s focus should be slaying inflation while avoiding a recession. House Democrats who voted for the bill deserve to be called out for supporting racial favoritism and undermining Fed independence. As for the President, the progressive agenda is apparently a higher priority than controlling inflation.
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