(Bloomberg) –The recent appointment of a prominent Democratic economist to lead the Federal Reserve Bank of Chicago is fueling friction over political partisanship in the US central bank.
Austan Goolsbee became president of the Chicago Fed in January, but only after a contentious hiring process.
Bloomberg News reported Feb. 17 that two of the Fed’s Washington-based board, both of whom had been nominated for their roles by then-President Donald Trump, took the rare step of abstaining from supporting the appointment.
And while the regional bank’s directors unanimously approved Goolsbee’s selection, several have a pattern of giving money to Democratic political candidates, a fact which hasn’t previously been reported.
Nothing prohibits directors of regional Fed boards from contributing to political campaigns, according to the Fed’s code of conduct. And there is no evidence suggesting a direct connection between the donations and Goolsbee’s selection, which a Chicago Fed spokesman said was “apolitical.”
Goolsbee, 53, is widely considered qualified for the job: Before joining the Chicago Fed, he spent nearly three decades as a professor at the University of Chicago’s Booth School of Business, and holds a doctorate in economics from the Massachusetts Institute of Technology. He also previously advised Democrats including former President Barack Obama and has a history of robustly defending Democratic policies and criticizing Republican ones on TV and radio talk shows.
Such a history is providing fresh impetus to concerns that the central bank is becoming increasingly politicized, risking the independence of monetary policy from the cut and thrust of government.
Goolsbee’s appointment, which was backed by Fed Chair Jerome Powell and four other governors in Washington, also raises questions about the opaque process for choosing regional Fed leaders. Bloomberg obtained a record of the Fed board vote on his appointment through a Freedom of Information Act request.
It follows a series of recent controversies among the regional Fed banks that has prompted bipartisan calls in Congress for more Fed oversight, and led to internal changes aimed at reining in political activity.
“The central bank is way more political than it appears,” said Kaleb Nygaard, a research fellow at the University of Pennsylvania’s Wharton Initiative on Financial Policy and Regulation. “Just because the reserve banks are one step removed from partisan politics, that doesn’t mean they are not partisan positions.”
Governors Christopher Waller and Michelle Bowman declined to comment on their decisions to withhold support for the pick. Goolsbee, who cast his first vote on monetary policy this year, also declined to comment, the Chicago Fed spokesman said.
Goolsbee is among several people under consideration to be President Joe Biden’s choice to succeed Lael Brainard as Fed vice chair in Washington, Bloomberg News reported Feb. 23. That role would require Senate confirmation.
Democratic Donors
Regional Fed presidents, by contrast, are chosen by their local boards of directors — typically business and community leaders — subject to final approval by the seven-member board of governors in Washington.
Of the six directors involved in Goolsbee’s appointment, four have a history of giving to Democratic Party candidates or causes, according to campaign finance disclosures. The Chicago Fed district includes Republican strongholds like Iowa and Indiana.
The co-chair of the search committee, Helene Gayle, contributed $71,800 to Democratic campaigns since 2011, including the Biden Victory Fund and Hillary For America, according to Federal Election Commission records compiled by Bloomberg.
Gayle, who is the president of Spelman College, left the Chicago Fed board when her term expired at the end of 2022. She is the former president and chief executive of The Chicago Community Trust foundation.
“My contributions made in my personal capacity are separate matters and in no way influenced my work or decision-making during my service on the board of directors,” Gayle said in a statement. The board “made our selection based on the candidate we felt was best qualified for the role.”
Another Chicago Fed director who had a vote on Goolsbee was Juan Salgado, the chancellor of City Colleges of Chicago and the board’s deputy chairman. Salgado serves on the board of the Obama Foundation, based in Chicago, and Waller abstained from his approval for a Chicago Fed board seat. Salgado referred questions to the Chicago Fed.
“The selection process and eligibility criteria for board members does not include discussion of party affiliation or past or current support for candidates and/or political parties,” said Michael Adleman, a Chicago Fed spokesman. “The board of directors of the Federal Reserve Bank of Chicago is apolitical in nature.”
Lawmaker Angered
Separately, the selection of a White person to helm the Chicago Fed also angered a veteran Democratic senator, Robert Menendez of New Jersey, who had repeatedly requested the Fed hire a Hispanic leader.
Menendez responded to Goolsbee’s appointment in December by saying it’s “unacceptable, and quite honestly a slap in the face to the 65 million Latinos in the country, that the Federal Reserve Board of Governors has ignored calls from Congress for a more inclusive and transparent leadership selection process.”
Other regional Feds have at times been run by figures who previously served in presidential administrations.
Janet Yellen, the current US Treasury secretary, served as an economic adviser to President Bill Clinton and was a Fed governor before running the San Francisco Fed from 2004 to 2010. Raphael Bostic, currently the Atlanta Fed chief, served as an assistant secretary for policy development from 2009 to 2012 at the Department of Housing and Urban Development under Obama.
Despite those backgrounds, Yellen, Bostic and other officials in their vein have generally been seen as technocrats, rather than partisan messengers.
Goolsbee’s history as an outspoken defender of Democrats and GOP critic makes him unusual, and Fed watchers said they were surprised by the selection, particularly given the pressure the central bank has faced to steer clear of politics.
The regional chiefs, who oversee a dozen districts across the US, vote on rate decisions that affect millions of Americans, and rotate as voting members of the Fed’s policy committee four at a time each year. In recent years, they have tended to come from within the Fed system, academia or the financial sector, and their appointments have historically drawn little opposition.
The regional character of the Fed is viewed as a strength, as the presidents can bring on-the-ground information from their districts to national policy making.
Given the diversity of these regions, where a single district can span from Baltimore to rural Southwest Virginia, staying out of politics has long been viewed as an asset among most reserve bank presidents.
“I object vehemently to making the Federal Reserve partisan,” said former Philadelphia Fed president Charles Plosser. “Independence needs to be protected. The Fed needs to protect itself from appearing to become partisan.”
Minneapolis Fed President Neel Kashkari, a former George W. Bush administration official who previously ran as a Republican candidate for governor in California, faced criticism from Congress and inside the Fed in 2020 when he teamed up with a retired Minnesota Supreme Court justice to propose an amendment to the state constitution.
‘Political Problems’
Goolsbee’s Democratic brand raises questions about whether the Fed board is “keeping an eye out for potential political problems,” said Sarah Binder, a political scientist at the Brookings Institution in Washington and co-author of “The Myth of Independence: How Congress Governs the Federal Reserve.”
A strong political orientation such as Goolsbee’s is not unusual for presidential nominees to the Fed Board or other technocratic jobs in government, said Peter Conti-Brown, an associate professor at Penn’s Wharton School and a Fed scholar, and it’s acceptable because these officials are vetted by elected representatives.
“This is not the case for the reserve banks,” he said, where leaders are picked by private boards.
Supposedly, “the benefit of the reserve bank system is you get independent, non-partisan judgment and a check on democratic excesses,” said Conti-Brown, who’s also co-director of the Wharton Initiative on Financial Policy and Regulation. But in the reserve bank selection process “we just channel those excesses and politics into more secret spaces,” he said.
Goolsbee served as chairman of Obama’s Council of Economic Advisers from 2010 to 2011. His direct experience with fiscal policy and research on innovation bring potential to enhance the Fed’s business cycle debates.
His sharp communication skills are also an asset to the Fed at a time when monetary policy revolves around projecting a credible framework to the public.
As Obama’s CEA chair, Goolsbee presented several video “white board” discussions where he explained everything from disagreements with Republicans over taxes to programs supporting startups.
He has also been an occasional sparring partner with Fox News anchor Sean Hannity. And in a podcast with former Senator Al Franken, a Democrat, he said of Trump: “Everywhere he goes he brings this cloud of dirt that just sticks to everything.”
Resisting ‘Temptation’
Michael Strain, director of economic policy studies at the American Enterprise Institute, a conservative think tank, said he didn’t view Goolsbee’s Republican criticism as partisanship.
“Austan and I disagree about a lot of policy issues, but I think he is a serious scholar,” Strain said.
Even so, “he has to worry about the independence of the Fed, and that has to be front of mind when he speaks in public,” he added.
More swerves into political commentary would likely raise headaches for Powell, who on Jan. 10 spoke about resisting “the temptation to broaden our scope to address other important social issues of the day.” Powell is set to testify on Capitol Hill next week for his semiannual congressional testimony.
Over the past three years, seven of the 12 presidents of the central bank’s regional outposts stumbled into ethics scandals, butted heads with Congress over transparency, or faced complaints that they strayed beyond their mandate into politically charged issues such as climate change and inequality.
Fed officials quietly tightened internal restrictions on employees’ political activities after some reserve banks ran afoul of Congress over real or perceived engagement on issues within the domain of elected officials. The code of conduct now explicitly prohibits the kind of activity that Kashkari engaged in.
Frustration with the Fed was high in the last congressional session. Two members of the Senate Banking Committee who served as icons of progressivism and conservatism — Elizabeth Warren and Patrick Toomey — teamed up on a bill to make the Fed more transparent.
Sherrod Brown, the Ohio Democrat who chairs the committee, told Bloomberg News in January that “more aggressive oversight” of the Fed was needed. “I do think they have not always gone in the direction of the public interest,” Brown said.