When Donald Trump shred yet another norm late last month by commenting on monetary policy and criticizing Federal Reserve Chair Jay Powell for raising interest rates, frenzied pundits speculated about whether Trump will respect the Fed’s “independence,” long deemed sacrosanct.
This was not the first time Trump had spoken about his policy preferences at the Fed. During his campaign, he demagogued against then-Chair Janet Yellen and condemned her low interest rate policies—then immediately reversed his views after taking office. In this as in so many other policy areas, Trump’s behavior is both incoherent and self-serving.
But the real threat to the Fed’s independence isn’t coming from Trump—it’s coming from Wall Street. The Fed’s structural flaws have led to regulatory capture, which compromises its ability to set monetary and regulatory policy in a manner that isn’t tilted to favor those at the very top of the economic ladder. Trump may have broken a norm by commenting on monetary policy, but the Fed’s status quo is unaccountable, opaque decision-making shaped by deep conflicts of interest with the very financial institutions the Fed is ostensibly supposed to supervise.
Consider, for instance, the abrupt resignation in March of David Cote from the New York Fed’s board of directors—a move that came as a shock to many Fed watchers. Cote was one of just a couple people responsible for choosing the next president of the New York Fed, the most powerful economic policymaking position in the country that Trump doesn’t control. Yet before the search for New York Fed President Bill Dudley’s successor had formally concluded, Cote left the board to pursue “new business opportunities that could affect his eligibility to serve”—later revealed to be helping Goldman Sachs undertake an ambitious corporate acquisition strategy.
The New York Fed claims that Cote and his fellow board members had already decided on former San Francisco Fed President John Williams to succeed Dudley by the time that Cote announced his resignation, but that means that Cote was simultaneously negotiating a new gig at Goldman Sachs while selecting one of Goldman’s top regulators.
The entire ordeal served as an unsettling reminder of the cozy relationship between the Federal Reserve and the biggest behemoth on Wall Street. Prior to being selected as New York Fed president in 2009, Dudley was Goldman Sachs’s chief economist. In 2008, Goldman Sachs Director Stephen Friedman chaired the New York Fed’s board of the directors at the same moment that it was reviewing Goldman’s application to become a bank holding company. In 2014, leaked tapes exposed New York Fed regulators pressuring one of their examiners to back off of a finding that would have imperiled Goldman Sachs’s ability to engage in a deal with Banco Santander. And in 2015, the Fed chose three consecutive men with strong ties to Goldman Sachs to be new Federal Reserve Bank presidents.
Each of the 12 Federal Reserve Banks has the responsibility of supervising the financial institutions within its district. Though commercial banks are regulated by the Fed, they’re also “shareholders” in these regional Reserve Banks, giving them the authority to elect six of the nine directors at each Reserve Bank—three Class A directors and three Class B directors. (Another three Class C directors are appointed by the Fed’s Board of Governors.) Together, the Class B and Class C directors elect the Reserve Bank president and then decide whether to reappoint them to a new term every five years.
These directors are rife with conflicts of interest. Besides Cote—a Class B director who was once the CEO of technology and manufacturing giant Honeywell—JPMorgan Chase CEO Jamie Dimon served as a Class A director while the New York Fed was arranging the sale of Bear Stearns to Dimon’s bank. Though Dodd-Frank reformed the presidential selection process by removing the Class A directors from the presidential selection process, Wall Street still maintains a heavy hand in the process. When banks have a such a powerful role in picking some of their key regulators at the Fed, the very concept of “Fed independence” is inherently illusory.
Directors like Cote are pervasive throughout the Federal Reserve System. In addition to choosing Reserve Bank presidents, directors are supposed to inform Fed decision-making by advising on economic conditions in their region. Though Fed Chair Powell and his predecessors have insisted that they are focused on making the Fed more diverse, directors at the regional Reserve Banks are disproportionately white, male, and from corporate and financial backgrounds. This typically leads to the selection of Reserve Bank presidents who fail to represent the diversity of America’s workforce and instead bring the blinkered perspective of the financial industry to Fed deliberations.
The Federal Reserve weighs two competing mandates: maximizing employment while keeping inflation at a manageable level. For the vast majority of workers, it’s better when the Fed prioritizes the unemployment side of its mandate, because manageable levels of inflation, even levels slightly above the Fed’s target, facilitate wage growth. The average consumer is only hurt by inflation when it reaches unusually high levels. (And there really isn’t much risk of that happening right now, since economic conditions have shifted since the high inflation of the 1970s). Inflation is mostly a concern for the owners of capital. The more assets someone owns, the more they should worry about the value of those assets diminishing—meaning wealthy individuals have more reason to be concerned about inflation than do consumers and low-wage workers.
That’s why it’s a problem that the current leadership at the Fed skews so drastically toward people with high net worths. Since Congress tasked the Fed with pursuing full employment in 1978, unemployment has run higher than the Fed’s estimate of maximum employment 70 percent of the time. The Fed’s failure to properly weigh its full employment mandate is in large part a reflection of the priorities of its leaders.
Which brings us back to Cote. There are many Fortune 500 executives on regional Reserve Bank boards, but Cote is especially problematic. When Dodd-Frank regulations required companies to disclose the disparity between what they pay their CEO compared with their median worker, Honeywell was revealed to have an abnormally skewed 333:1 ratio. When Honeywell attempted to acquire United Technologies in 2016, Cote was accused of insider trading. And he was also one of the major figures behind “Fix the Debt,” a billionaire-funded initiative that, in the midst of the recovery from the Great Recession, was promoting the idea that every American would need to sacrifice to address the deficit. Was this the sort of economic insight Cote was providing to Fed officials while millions were out of work?
Of course, Cole’s troubling coziness with the financial industry mirrors that of Trump’s closest economic advisers. The president has placed a slew of Goldman Sachs alums in financial regulatory positions, and they’re set on unwinding Dodd-Frank, repealing limits on speculation by government-insured banks, and so on. Chair Powell and Vice Chair for Supervision Randal Quarles—Trump’s two confirmed appointees to the Fed’s Board of Governors—both worked at the private equity giant Carlyle Group, and their reign at the Fed has thus far been received warmly on Wall Street. The New York Fed is supposed to be an important check on the concentration of finance-friendly power on the Board of Governors, because the regional Reserve Banks are theoretically independent from Wall Street and Washington. Unfortunately, the opaque and pro forma manner in which Reserve Bank presidents are handpicked by Wall Street-friendly execs routinely results in the selection of the same set of individuals with the same set of impulses.
Some congressional Democrats are eager to address regulatory capture and expose the hypocrisy behind Trump’s Wall Street rhetoric. Many of the Democrats angling for a presidential run in 2020 have pledged to close the revolving door between Wall Street and Washington—and reinstate rules like Glass-Steagall that protect our economy from risk. Restructuring the Federal Reserve to be more responsive to the concerns of working families is an essential part of that agenda.
Thankfully, there is already momentum behind this. In 2016, Hillary Clinton joined 127 members of Congress in pushing for more diversity in the Fed’s upper ranks and the removal of banker-elected directors like Cote from the Reserve Bank’s boards altogether. That proposal was adopted in the Democratic Party platform later that year.
While it may be impossible to rein in Trump from spouting his uninformed opinions on monetary policy, there are options to limit the pervasive influence of finance on the Fed, especially if the Democrats win back the House in November and Congress has an actual appetite for ruffling the feathers of the wealthy. In addition to scrapping Fed directors elected by bankers, Congress may overhaul the broken process for selecting Reserve Bank presidents, imposing requirements for greater transparency and consideration of diverse candidates or bringing elected officials into the process for appointing and approving new presidents. Still, Congress could go further by expanding on its 2015 decision to reduce the annual dividend paid by the Fed to banks. (Eliminating the dividend altogether would end the legal ownership commercial banks have over regional Reserve Banks, thereby making the Fed fully public like every other central bank in the world.) Finally, Congress could encourage or empower the Fed to expand its toolkit so that it’s able to stimulate the economy with more than just low interest rates.
If Trump’s deregulatory moves lead to another crash or the economy enters a recession, as economists increasingly worry that it will, the Fed will again be at the center of the response. And Democrats must be ready with a set of reforms that ensure that the Fed is less tethered to Wall Street’s interests.