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A Woke Mandate for the Federal Reserve

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. {snip}

The House bill passed last week 215-207 with little media notice. {snip}

Recall that Candidate Biden advocated making reducing racial disparities a third monetary mandate. {snip}

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.

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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.

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