A recent Manhattan Institute report shows that the Federal Reserve directors have undergone a rapid ideological shift in the past decade.
Groupthink distracts the institution from its proper role of focusing on monetary concerns and representing the American economy.
A merica’s Federal Reserve system has always been an awkward hybrid of public and private. It is divided between a central Federal Reserve board (appointed by the U.S. president) and twelve Federal Reserve Banks, which are each overseen by their own boards of directors who are legally required to represent different sectors of the private economy and act in a nonpartisan fashion.
A recent Manhattan Institute report shows that the Federal Reserve directors have undergone a rapid ideological shift in the past decade and no longer appropriately represent the private economy. They have become more left-wing and are more likely to come from labor unions and nonprofits rather than traditional business sectors. As part of that shift, the regional banks have supported more left-wing causes and become less attuned to the nation’s economy.
By examining records of individual donations to political candidates and groups, previous researchers noted that Reserve Bank directors tended to be more conservative than most voters and donors. That has changed in recent years. The percentage of directors donating only to right-leaning candidates and groups since 2015 dropped from 24 percent to 8 percent. By contrast, directors donating only to left-leaning candidates and groups increased to 34 percent of the total from 19 percent. The share donating to both sides has dropped drastically since the early 2010s.
This swing reflects a shift in directors’ backgrounds. In 2010, directors were about equally likely to come from an energy and mining background as to come from consumer groups, community groups, and labor unions. In recent years, fewer than 3 percent of directors without a direct banking background came from energy or mining, while consumer, community, and labor groups have composed around 20 percent of such directors.
One reason for these shifts is the increased focus by the Fed on directors’ racial diversity rather than their other qualifications. The Fed set up a tracking system to measure diversity among directors, and Fed bank presidents have discussed ways to bring more non-whites onto boards. As a result, non-whites now make up 44 percent of all directors. This change has been most marked among the third of directors appointed directly by the Federal Reserve board in Washington, amongst whom 62 percent are non-white, which is far higher than the proportion of non-whites in the population. Non-white directors are less likely to come from traditional business backgrounds.
Those in charge of the Federal Reserve are clearly confused about the purpose of Reserve Bank directors. Although federal law forbids the consideration of race or ethnicity in the appointment of directors, the system has actively pursued it. And although federal law mandates that directors be selected to represent agriculture, industry, and other economic sectors, these backgrounds have been neglected. Instead, there has been an increase in the number of nonprofit executives with tenuous connections to the private-sector economy.
Bank directors — and, to some extent, the Federal Reserve Banks they oversee — no longer have the economic and financial background they once did, which makes the Reserve Banks less likely to dissent from the perceived expertise of the Federal Reserve board in D.C. Since the outbreak of Covid-19, and despite the worst inflationary surge in 40 years, there have been only three Fed bank president dissents on interest rate decisions, only two of which were for tighter policy. It perhaps says something that banks have been hosting events on “Racism and the Economy” and discussing how to “offer restorative housing reparations,” topics far removed from the monetary concerns that ought to be the principal preoccupation of the central bank.
The Fed’s director system no longer represents the different parts of the American producer economy. The fact that the directors were to the right of voters historically should be of concern just as much as the fact that today they are to the left.
Federal Reserve Bank directors should be representative but knowledgeable voices that can participate in the making of those banks’ policy and in the selection of qualified bank presidents. Only by bringing in experienced and balanced directors and presidents can the system avoid the ideological groupthink that has contributed to dangerous mistakes in recent years.