Price stability is more than enough for the Fed – no new mandates
It’s no secret that the Fed is struggling to control inflation. As it fails in its primary duty, Democrats are busy drafting executive orders, passing bills and proposing new laws that will expand the list of goals the Fed must prioritize.
As he stumbles to fulfill his current mandates of maintaining price stability, maximum employment, and financial stability, Congress and the administration are also calling on him to control greenhouse gas emissions, promoting equality in employment, income, wealth, and affordable credit across racial and ethnic groups, and proposing that the Fed be required to issue a new central bank digital currency. This madness must stop. The Fed already has too many conflicting mandates without adding highly politicized new ones. The Fed should focus on price stability.
In October 2021, dutifully complying with a May executive order, the Financial Stability Oversight Council (FSOC) released a report arguing that climate change poses a systemic risk to the financial system. To counter this risk, the FSOC has proposed that its members, including the Federal Reserve System, “integrate climate-related financial risk into their regulatory and oversight activities.” The FSOC’s primary regulatory tool to achieve this is “scenario analysis conducted by regulators to measure risk across a wide range of institutions”.
Scenario analysis is a purely hypothetical modeling exercise where institutions must simulate their profits and losses assuming a calamitous event occurs in the future. Financial regulators would spell out the fictitious calamity event as they do today in the stress-testing exercises the Fed imposes on major bank holding companies each year.
In the case of climate change risk assessment, the scenario would involve a so-called transient risk event where an unknown fear of climate change causes Congress to pass new laws that negatively impact gas-intensive businesses. greenhouse gases, or consumers to abandon activities that use fossil fuels. fuels. In these fictional scenarios, the impact of imaginary events inflicts severe distress on greenhouse gas-intensive companies, increasing their risk of default. This purely speculative risk of default will trigger higher capital requirements and other regulatory restrictions for financial institutions that hold their debt or equity, resulting in a higher cost and more limited access to capital for businesses to high greenhouse intensity.
Analysis of what-if scenarios formed the basis for the FSOC’s Global Systemically Important Institution designation of Metlife, Inc. in 2014. The designation subjected Metlife to the heightened prudential regulatory standards of the Dodd-Frank Act which s applied to the largest US bank holding companies. Metlife fought the designation in court and won arguing that the FSOC’s hypothetical scenario analysis had no historical or factual basis. As such, it was a violation of the arbitrary and capricious standard imposed by the Administrative Procedures Act. The analysis of climate change scenarios will be based on purely imaginary scenarios with no historical basis and should be declared illegal if the courts follow the Metlife precedent.
On June 21, the House passed HR 2543, the Federal Reserve Racial and Economic Equity Act. The law requires that the Federal Reserve “must perform its functions in a manner that promotes the elimination of racial and ethnic disparities in employment, income, wealth, and access to affordable credit.” The law applies to the conduct of monetary policy by the Fed, the supervision and regulation of banks, thrift companies, financial institution holding companies, systemically important financial institutions and services public financial markets designated by the FSOC. The Fed must periodically report to Congress on the actions it has taken and its pending plans to achieve these new mandates.
The Fed should be tasked with promoting equal opportunity for all, but a mandate to engineer equal outcomes is not compatible with our capitalist system – it is socialism pure and simple. Policies that impose the politically charged “equity and inclusion” agenda of the progressive left are a direct affront to the independence of the Fed to conduct monetary policy in a way that promotes price stability and employment. maximum.
The proliferation of Fed mandates does not stop there. Democrats are promising new legislation that will force the Fed to issue a central bank digital currency. Rep. Jim Himes (D-Conn.) recently released a “white paper” outlining features of digital currency the Fed will need to issue in legislation that has yet to be introduced. Himes plans to require the Fed to issue intermediated retail digital currency, which means that financial institutions and other qualified entities would be the customer interface for their digital wallets. These intermediaries would be responsible for meeting “know your customer” anti-money laundering regulations and for clearing and settling digital currency transactions using some type of secure limited-access blockchain ledger system. These intermediaries would presumably also develop innovative financial accounts and services to attract customer balances.
The Himes view of a Fed-compulsory digital currency is seriously flawed. The idea that it would make payments freely available to those who are currently unbanked is nonsense. All payment systems charge fees to process transactions, and distributed ledgers – at least those used today – are very expensive. The Bitcoin blockchain requires more electricity than the entire country of Argentina to process its digital transactions – and Bitcoin miners earn enough to cover electricity costs and earn a return to their mining rigs. Additionally, as I explain here, federally insured financial institutions could create tokenized deposit accounts insured up to the $250,000 FDIC insurance limit. These digital repositories could be designed to provide exactly the same services and meet the criteria and benefits envisioned by Representative Himes without forcing the Fed to issue a new retail digital currency.
It’s no longer a headlong rush from the Federal Reserve’s mission, it’s a sprint, and it’s no joke. At a time when the Fed has failed to bring inflation under control, giving it more mandates, especially such politically charged mandates as tackling climate change, implementing an “equity and designing and issuing a new retail Federal Reserve digital dollar would ensure it fails in its primary task of providing price stability with maximum employment. The Fed already has too many mandates. It should focus on price stability.
Paul Kupiec is a Senior Fellow at the American Enterprise Institute, specializing in banking and financial services issues.