Three nominees for vacant Federal Reserve posts may have been testifying Thursday in front of the Senate Banking Committee, but the most anticipated — and critical — volley of viewpoints may have been that between Sarah Bloom Raskin — President Joe Biden's pick to serve as the central bank's vice chair of supervision — and Sen. Pat Toomey, R-PA, the panel's ranking member.
Toomey has asserted that, if confirmed, Raskin would use her position to advance a stricter stance toward lending to companies in sectors with a comparatively large carbon footprint.
“[Raskin] has recently and repeatedly and expressly advocated that financial regulators generally, and the Fed in particular, allocate capital away from the fossil-fuel sector, for instance, because she thinks climate change is just such a serious thing that the Fed simply has to step up and do this,” Toomey told CNBC on Wednesday. “That’s not a decision to be made by unelected Fed governors who never face the voters.”
In her opening statement, Raskin sought to assuage lawmakers who may see her nomination as overtly political.
“Bank supervisors must make sure that the safety of banks and the resilience of our financial system are never compromised in favor of short-term political agendas or special interest groups,” she said. “The role does not involve directing banks to make loans only to specific sectors, or to avoid making loans to particular sectors.”
Raskin, in a May 2020 New York Times op-ed, criticized the Treasury and Fed for allowing oil, gas and coal companies to be eligible for government-backed emergency-lending relief launched in the early COVID era.
"The decision to bring oil and gas into the Fed’s investment portfolio not only misdirects limited recovery resources but also sends a false price signal to investors about where capital needs to be allocated," she wrote. “The decisions the Fed makes on our behalf should build toward a stronger economy with more jobs in innovative industries — not prop up and enrich dying ones."
When pressed Thursday, Raskin said "it is inappropriate for the Fed to make credit decisions and allocations based on choosing winners and losers. Banks choose their borrowers, not the Fed.”
Toomey called her remarks “one of the most remarkable cases of confirmation conversion I have ever seen.”
“Unelected officials like Ms. Raskin want to misuse bank regulation to impose environmental policies that Congress has refused to enact,” he said.
Steven Kelly, a research associate at the Yale Program on Financial Stability, noted to The Wall Street Journal that Raskin’s testimony was “inconsistent with her past views,” but that a person can hold two beliefs: “one as a policy maker and another one as a commentator who has the latitude to think more loftily.”
One Democrat on the banking committee, Sen. Tina Smith of Minnesota, bemoaned what she saw as a Republican "obsession with keeping ... the risks of climate out of any conversation that the Federal Reserve is having."
Sen. Elizabeth Warren, however, noted that Fed Republicans, too, have espoused the view that banks should understand climate risks and be prepared to manage them.
“I don’t support Chair [Jerome] Powell’s nomination for another term running the Fed, but even he thinks that it is just common sense that the Fed should work to mitigate the risk of significant economic loss triggered by climate change,” the Massachusetts Democrat said.
Senate Minority Leader Mitch McConnell, R-KY, said Raskin's nomination holds more at stake than just climate policy. “Opening this Pandora’s box would transform the Fed from an apolitical central bank into a hyper-political super-legislature,” he said.
To that end, Raskin, in her testimony Thursday, called the independence of the central bank "sacrosanct."
Raskin, who served as a Fed governor from 2010 to 2014, is not the first nominee Toomey has grilled over her views on climate.
At another hearing last month, Toomey asked Lael Brainard, the candidate for the central bank's other vice chair role, whether her support for more climate research and analysis at the Fed was "a precursor to direct capital away from" fossil-fuel companies.
"We would not tell banks which sectors to lend to or not lend to, but we do want to make sure they are measuring, monitoring and managing [their] material risks," Brainard said.
Toomey targeted that argument in his appearance Wednesday on CNBC.
“What we hear is, ‘Oh, what we really want to do is have a climate scenario analysis. We want to require the banks to understand their risks,’” he said. “Banks understand the risks they take if they’re lending to developers along a coast. Really, what this is about is creating a set of tools that they can later use to require banks to have, say, higher capital weighting if they lend to disfavored industries.”
Allegations of influence
At another point in the hearing, an exchange between Raskin and Sen. Cynthia Lummis became heated when the Wyoming Republican appeared to accuse Raskin of using her standing as a former Fed governor to help the fintech Reserve Trust — where she served on the board of directors — gain a master account with the central bank, a rarity among fintechs. The account gives Reserve Trust access to the Fed’s payments system and allows it to move money without working with a bank.
The Federal Reserve Bank of Kansas City denied Reserve Trust's first application for a master account in June 2017, a month after Raskin joined the board of the Colorado-based startup, CNBC reported.
Lummis said Thursday that Raskin called the Kansas City Fed in August 2017 about the denied application. Reserve Trust was granted a Fed master account in 2018, the senator said.
Raskin repeatedly refused at Thursday’s hearing to say whether she called the Kansas City Fed on behalf of Reserve Trust. But Lummis kept pressing.
"Something doesn't smell right with the way this played out," she said, according to American Banker.
“Certainly, if you are suggesting anything improper, I want to make very clear that, first of all, I have had the honor to serve in various public capacities, and each time I left, I have been very mindful of the rules regarding departure,” Raskin replied.
A White House spokesperson defended Raskin’s ethical compass in a statement to CNBC and Bloomberg.
"As part of her nomination, she worked with career officials at the Federal Reserve and the Office of Government Ethics to comply with all ethics requirements — just as she did the previous two times she was confirmed by the Senate," the spokesperson said. "Senator Lummis engaged [in] innuendo with no facts presented to back up her false claims. If Senator Lummis had any information to back up her innuendo she would have presented it at the hearing.”
However, Toomey sent the Kansas City Fed a letter this month requesting information on the alleged call. A Republican aide told CNBC that Raskin did call the Kansas City Fed in August 2017, according to a central bank official.
Raskin was not the only nominee lawmakers examined Thursday. All three nominees addressed inflation in their opening statements.
"The spike in inflation we are seeing today threatens to heighten expectations of future inflation," Fed nominee Philip Jefferson said. "The Federal Reserve must remain attentive to this risk and ensure that inflation declines to levels consistent with its goals."
Raskin said reducing inflation "must be a top priority while we continue to sustain our economic recovery."
Lisa Cook — who, if confirmed, would become the first Black woman to serve on the Fed board — also weighed in.
"High inflation is a grave threat to a long, sustained expansion, which we know raises the standard of living for all Americans and leads to broad-based, shared prosperity," she said. "That is why I am committed to keeping inflation expectations well anchored."
Sen. Bill Hagerty, R-TN, noted Cook's academic background "doesn’t seem related to the mission of the Federal Reserve.”
“If I look at your list of publications and your speeches, it seems more like social science than it does economics and monetary policy,” he said at Thursday's hearing.
Cook testified that her previous work with the White House Council of Economic Advisers related to financial crises.
Smith, for one, said Fed expertise also touches on labor policy, consumer protection and bank supervision.
“The Fed is not some sort of monetary policy monastery where the governors go off and just sort of only consider the impacts of monetary policy,” she told Bloomberg on Wednesday.
The Fed nominees: Raskin, Cook, Jefferson, Brainard — and Fed Chair Jerome Powell, who's being renominated — face a vote by the Senate banking panel Feb. 15. Fed nominees need a simple majority to pass out of the committee, then must garner the same proportion in the full Senate to be confirmed.