Trump, Lisa Cook, and the Federal Reserve’s Independence
The Constitution gives Congress the power to coin money and regulate its value. Congress, in fulfilling that delegated responsibility, created the Federal Reserve. In carrying out narrowly defined monetary policy, the Fed isn’t subject to executive authority. By passing the Federal Reserve Act of 1913, the Banking Act of 1935 and subsequent legislation, Congress created a central bank with seven board members, or governors, appointed by the president and confirmed by the Senate. These board members serve for 14 years, the longest terms of any appointees in the federal government other than federal judges and the comptroller general, whose term is 15 years. They serve staggered terms to limit the appointment opportunities of any president. Congress built the system this way to make the Fed as independent in conducting monetary policy as the Constitution would allow.
The Fed is independent only in its conduct of narrowly defined monetary policy. When the Federal Reserve Board became one of the nation’s most vocal supporters of massive federal spending during and after the pandemic, it was operating outside its remit. That was also true when the Fed allowed itself to get caught up in climate politics and created internal climate committees. It also jumped on the DEI bandwagon: It sponsored a diversity conference and redefined its maximum employment mandate to be “a broad and inclusive goal.”
By involving itself in the political process, the Fed undercut the argument that it should be independent of that political process. Political independence, like virtue, is hard to reclaim once lost.
Despite the Fed’s failings, we continue to support its independence in conducting monetary policy and oppose the president’s attacks on it. We don’t take this stance because we support the actions of the current board but because those principles hold true regardless of who holds office at the Fed.
In 2017 we both urged President Trump to appoint as chairman John Taylor of Stanford’s Hoover Institution. Jerome Powell’s monetary record is mixed. He deserves credit for bringing inflation down from its 40-year high and, at least so far, reducing the Fed’s balance sheet without disrupting economic activity. On the other hand, he helped cause that inflation when he refused to respond to rising prices based on the argument that the inflation was the result of a supply shortfall and therefore transitory. That argument wasn’t credible given that the federal government was spending more in two years than it had ever spent in three and the Fed during the pandemic was expanding the money supply faster than in any other year since World War II ended. But again, the issue isn’t Mr. Powell’s record—it’s monetary-policy independence.
That brings us to Gov. Lisa Cook. We don’t have sufficient information to judge whether she violated the law or engaged in unethical conduct worthy of removal. There has yet to be a formal investigation, and she has not been formally charged, much less convicted, of anything. Her “for cause” firing appears to be another assault on monetary policy independence.
Does the president have the authority to fire Mr. Powell or any other member of the board at his discretion? We believe that in creating the Federal Reserve, Congress delegated an enumerated power that Article I, Section 8 of the Constitution had given it. The Founding Fathers knew the long history of executives abusing the power to create money. As with other potentially dangerous powers, such as the power to tax, spend public money and declare war, the Founders concluded that the safest bet was for Congress to hold “the power to coin money and regulate its value thereof.”
Congress allowed the president to appoint Federal Reserve governors subject to the advice and consent of the Senate, but Congress didn’t and had no authority to delegate its enumerated power to the executive branch. Under the Constitution, the Fed is accountable to Congress in conducting monetary policy. All power of the executive branch flows through the president, and the president has authority to remove any official in any executive-branch agency. But the Fed in conducting monetary policy isn’t an executive-branch agency. It is carrying out a function given by the Constitution to Congress. Therefore, it has independence that executive-branch agencies don’t.
The president acknowledged this independence when he exempted Fed action setting interest rates and conducting monetary policy from his February executive order extending executive oversight of government regulatory policy. Certainly a case can be made that executive authority applies to the Fed’s regulatory powers, which were given by the Dodd-Frank Act, but that will have to be decided by the courts.
Presidential control of monetary policy would be a threat to financial stability and American prosperity. So far, preserving the separation of powers has fallen almost exclusively to the courts. At some point, Congress must step up to protect its own authority.
While we don’t put the Federal Reserve at the same level of importance as the Supreme Court, Mr. Trump would be wise to heed a lesson from history. President Franklin D. Roosevelt had his way with Congress until he tried to pack the Supreme Court. Then his own vice president broke with him, Congress rejected the attempt, and from that moment, lawmakers exercised their own judgment on FDR’s initiatives.
Mr. Gramm, a former chairman of the Senate Banking Committee, is a nonresident senior fellow at the American Enterprise Institute. Mr. Hensarling, a former chairman of the House Financial Services Committee, is an economics fellow at the Cato Institute.