Can a footnote save the Federal Reserve?
FALMOUTH, UK – The independence of the US Federal Reserve is back in the spotlight. At the end of May, Fed Chairman Jerome Powell met with President Donald Trump at the White House “to discuss economic developments,” as the Fed tartly put it in a post-meeting statement. Market participants will be wondering what happened.
Held at the president's request, the meeting was exceptional, but not unprecedented. Fed presidents have met with other presidents on occasion, though those occasions were generally not very favorable. In 1965, William McChesney Martin met with Lyndon Johnson at LBJ's ranch in Texas. Johnson feared that a Fed interest rate hike would hamper growth and anticipated a difficult midterm election.
LBJ confronted the Fed chairman both physically and verbally, using his considerable bulk to back Martin up against a wall. The impact on Fed policy remains controversial to this day. President Richard Nixon met with his Fed chairman, Arthur Burns, on numerous occasions, regularly pressing him to implement expansionary monetary policies, something Burns graciously complied with.
In 1984, with new elections looming, Ronald Reagan summoned Paul Volcker to the White House, where James Baker, the president's chief of staff, ordered him not to raise interest rates. Ben Bernanke met repeatedly with George W. Bush during the global financial crisis, when cooperation to prevent the collapse of the financial system was imperative. Powell himself dined with Trump at the White House in 2019.
Regular meetings do not pose a threat to the central bank's independence. Independence demands accountability, and by describing the Fed's priorities and overall outlook to the chairman, the chairman demonstrates accountability to the public. But, as in the case of Nixon and Burns, a president who regularly harangues the Fed chairman, specifically on interest rate policy, threatens that independence.
Trump, of course, has repeatedly criticized the Fed's interest rate decisions. The Fed's post-meeting statement was careful to mention that "monetary policy expectations" were not addressed. So far, so good, assuming the statement can be taken at face value. The second event that raised questions about the Fed's independence was the Supreme Court's May 22 decision in Trump v. Wilcox, in which the Court granted an administration request to allow the president to fire members of independent government agencies such as the National Labor Relations Board, which oversees union elections and labor laws.
Technically, the Court suspended a lower court ruling that would have suspended the president's impeachment power, suggesting that presidential discretion is justified because NLRB members "exercise considerable executive power." In other words, they are de facto members of the executive branch, subordinate to the president. This logic would seem to put the Federal Reserve squarely in Trump's crosshairs.
But in a 6-3 ruling, the court's six-member majority explicitly exempted the Federal Reserve. "The Federal Reserve," the justices reasoned, "is a quasi-private entity with a unique structure that follows the distinctive historical tradition of the First and Second Banks of the United States."
This argument could be considered solid support for the independence of the Federal Reserve, except that it is inexpert, illogical, and ahistorical. The First and Second Banks of the United States, which performed limited functions on behalf of the government between 1791 and 1836, were private banks, period. In addition to providing depository services to the government, they competed with other banks, making commercial loans. Their private character was anything but quasi-private.
In contrast, the Federal Reserve Board—assuming that's what the justices mean when they write "Federal Reserve"—is composed of seven public officials appointed by the president. The Federal Open Market Committee (FOMC), responsible for interest rate policy, includes those seven board members and five regional Reserve bank presidents, who are appointed by the Reserve bank governors, subject to Federal Reserve Board approval. The regional Reserve banks come closest to being "quasi-private," since private citizens serve on their boards. But to argue that this is also true of the FOMC or the Federal Reserve System as a whole is fallacious.
Beyond the Fed's governance lies the scope of its authority. The First and Second Banks of the United States lacked statutory authority to regulate banks, a key public policy mandate of the Fed.
To justify its decision, the majority cited an earlier ruling, Seila Law LLC v. Consumer Financial Protection Bureau, in which the Court upheld the president's authority to remove the heads of agencies run by a single director rather than a board. That decision included a footnote stating that the Second Bank and the Federal Reserve "may claim special historic status." However, it provided no legal basis for this claim or judgment on its validity. The footnote reads like a hallucination by ChatGPT.
Removing checks on presidential powers while arbitrarily exempting the Federal Reserve opens the door to not arbitrarily exempting it. Defenders of the Federal Reserve's independence should be concerned. Perhaps that's what Trump and Powell were talking about.
The author

Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021).
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