When Hillary Clinton clashed with Donald Trump last week over his criticism of the Federal Reserve, she said it was out of bounds for presidential candidates to weigh in on how the central bank sets interest rates.
Yet Clinton herself and many other Democrats have thrown their support behind an idea that would bring a fundamental change to what may be the most powerful agency of the U.S. government.
The Democratic presidential contender is backing a proposal to remove private bankers from all the Fed’s regional boards, stripping them of their leadership role at the institution. That position is shared by a coalition of progressive groups and the Democratic Party platform committee. Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have also raised concerns about the over-representation of banks and corporations in senior roles at the Fed.
Top Federal Reserve officials, who have long dreaded interference by presidents and Congress, are vehemently opposed to the idea, arguing that the expertise of private bankers is vital. Two Fed presidents testified against the proposal on Wednesday before a House Financial Services subcommittee.
For the Fed, there’s one ray of hope: Revamping the regional boards would likely open the door to a host of competing reforms that Democrats and Republicans are itching to make to the century-old central bank. And that means the Fed may be saved by a lack of consensus on making big changes to its structure.
Leading Democrats in Congress and outside liberal groups are pushing a range of far-reaching ideas to shake up the Fed’s leadership. Republicans have held votes on legislation to strengthen audits and make other changes to the central bank.
“I like her proposal,” Sen. Sherrod Brown, the Ohio Democrat expected to chair the Banking Committee next year if the GOP loses control of Congress, said of Clinton in an interview Tuesday. “I don’t know if it’s comprehensive enough for where we go.”
Clinton’s campaign, which is eager to boost support from progressive Democrats, has made a big play to align her with an increasingly influential coalition, called Fed Up. The group, organized by community and labor groups, is pushing for continued low interest rates to boost job growth. Trump on Monday called on the Fed to “change” rates, saying it was keeping them artificially low and creating a “false economy,” drawing the rebuke from Clinton.
Fed Up has also been promoting the proposal to restrict individuals associated with financial institutions from serving on the boards that oversee regional Fed banks across the country.
Earlier this year, Clinton gave the movement a big boost when her campaign announced that the Fed “needs to be more representative of America as a whole” and that there were “long overdue” reforms including the idea to take bankers off the Fed boards.
While liberals have applauded Clinton for engaging on the issue, Democrats for years have been pushing for a broader set of changes to the central bank.
Brown said he wanted to take a more comprehensive look at the Fed, including diversity measures related to gender, race and background; whether to make the president of the powerful Federal Reserve Bank of New York subject to Senate confirmation, and whether to have greater “political oversight" of officials who set monetary policy as part of the Federal Open Market Committee.
Yet he acknowledged that making changes would open a “can of worms” involving what he called the “nativist wing of the Republican Party.” These, he said, include Kentucky Sen. Rand Paul’s “Audit the Fed” bill, which would subject monetary policy decisions to investigation by the Government Accountability Office. Senate Democrats blocked the measure in January.
Warren, a Massachusetts Democrat who has also pushed for a more diverse set of Fed leaders, has proposed legislation that would curtail the Fed’s lending powers and boost the autonomy of officials appointed to the Fed’s Board of Governors.
At a House Financial Services subcommittee hearing this week on the regional Feds, the broad array of ideas on how to modernize the Fed was put on display.
The committee’s top Democrat, Rep. Maxine Waters of California, also supports the idea of removing bankers from the Fed boards, and she was on the panel that helped draft the Democrats’ 2016 policy platform that contains the proposal.
At the hearing, Kansas City Fed President Esther George and Richmond Fed President Jeffrey Lacker each defended the presence of board members with financial backgrounds.
“The presence of bankers on Reserve Bank boards is said to represent a conflict of interest since Reserve Bank staff supervise banks,” Lacker noted. “But strict rules limit bankers’ roles; they simply have no avenue through which they can influence supervisory matters.”
He argued that bankers are “particularly well-positioned to report on economic conditions in their footprints.”
Removing bankers from Fed boards isn’t garnering as much enthusiasm among Republicans.
Rep. Bill Huizenga, a Michigan Republican who chairs the House Financial Services monetary policy subcommittee, said he has no problem with board members having connections to financial companies. But he acknowledged it can be a problem “if you are only listening to one particular region or one particular industry.”
Huizenga has proposed legislation that would make a variety of changes to the central bank, including reducing the influence of the New York Fed by removing its status as a permanent voting member on the body that sets monetary policy.
Before the Republican-led House passed the bill in November, the White House threatened to veto the legislation because it included an audit requirement that the administration argued "would almost certainly have negative impacts on the Federal Reserve's work to promote price stability and full employment."
Democrats are also split on the issue of bankers’ being on the regional boards.
Rep. Gwen Moore (D-Wis.) told reporters after the hearing that while she doesn’t object to the presence of bankers on the boards, “I’m concerned about the voice of the other directors who are there and their efficacy to participate fully.”
Moore said it was “very scary” to talk about potentially partisan reforms that could threaten the Fed’s independence. The process of reform, she said, probably “wouldn’t be clean and neat, and that’s why I’m saying it needs to be buoyed by objective information that’s not partisan.”