Last week Senator Pat Toomey, Republican of Pennsylvania, made three recommendations designed to reduce the politicization of the Federal Reserve System. First, Senator Toomey recommends that the twelve Federal Reserve banks that are overseen by the Board of Governors of the Federal Reserve System be subject to the Freedom of Information Act. FOIA, 5 U.S.C. § 552, requires the full or partial disclosure of previously unreleased information and documents controlled by a U.S. government agency upon request.
The problem here is that FOIA is applicable to the United States government. While the Board of Governors is an independent government agency, the twelve reserve banks are not. The twelve reserve banks are individually incorporated and their stock is owned by commercial member banks that are in one of the twelve federal reserve districts. Subjecting the twelve banks to FOIA given the current structure of the Federal Reserve System would be difficult and likely create a constitutional slippery slope for other private organizations.
Mr Toomey wants to further challenge the independence of the twelve federal reserve banks by requiring that their bank presidents be nominated by the U.S. president and confirmed by the U.S. Senate. If Mr Toomey wants to maintain the Federal Reserve as a non-politicized entity, subjecting federal reserve bank presidents that head private organizations to a political appointment and selection process does not appear in line with keeping the Federal Reserve System non-political. Whether subtle or blatant, a federal reserve bank president will give political actors a little more listening time than they would to other citizens.
The third recommendation appears to be the most extreme. Mr Toomey recommends either shrinking the number of banks down from the current twelve to five with the remaining five bank presidents becoming permanent voting members of the Federal Open Market Committee, or eliminating the twelve federal reserve banks altogether.
The FOMC’s primary responsibility is the development of U.S. monetary policy, including setting the federal funds rate, the interbank overnight rate at which commercial member banks exchange with each other their reserves on deposit with the Federal Reserve. The FOMC is made up of the seven Federal Reserve governors, the president of the Federal Reserve Bank of New York, and four other federal reserve bank presidents serving a one-year term on a rotating basis.
The twelve federal reserve banks serve as an informational conduit from their respective districts to the Board of Governors. Would Mr Toomey’s recommendation not serve to eliminate an information channel from local communities to the FOMC while further centralizing and immersing the Federal Reserve into national political influence?
So far, I see no legislative threats on the horizon to the current Federal Reserve System structure. Mr Toomey’s recommendation, however, is another example that currency is political.
Alton Drew 08.03.2022
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