The Growing Risk to Fed Independence That Wall St Isn't Watching

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1:57Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracey Alloway. And I'm Joe Wozenthal. Joe, it's been a big week for us. We were cited in an SEC filing for the interview we did with Brad Jacobs. I think it's the first time I've ever seen a full podcast transcript. It was nice because we used to write transcripts and it's like, I was getting to be so much work. And then it turned out, so we recently interviewed Brad Jacobs, his team did a full transcript and submitted it to the SEC. It was very nice of them. Doing our work for us. And then the other thing that happened is we were also cited in a lawsuit all in one week.

2:31All in one week. That's right. You know, we've done some episodes. We were down in D.C. recently, and we had the opportunity to interview the new chair of the FTC under President Trump. And a section of that interview actually got included in a news lawsuit. Actually, you could take a listen to it. There's also, I think, some benefits in certain circumstances to having multi-member agencies with people from both parties. I mean, look, if you have an agency that is exceeding the law, abusing the companies that it purports to regulate, it's helpful for markets, for courts, for litigants, for government transparency to have people in the other party pointing this out and saying it in a sense, like, you know, I wrote 400 plus pages of dissents during my time as a minority commissioner.

3:17I think that that adds value. Right. So we spoke to Andrew Ferguson. He was talking about how much he loves having minority commissioners. And then the very next day, there was news that Trump had fired the two Democratic commissioners, Alvaro Bedoya and Rebecca Kelly Slaughter. And so they have since filed this lawsuit in which we're cited, arguing that they were illegally fired. Commissioners are supposed to be fired based on an actual reason. You have to have cause. And I don't think there was any really cited in this. And the interesting thing here is I know it seems like a very niche topic.

3:55Why are we discussing this FTC lawsuit other than the fact that we're mentioned in it? But it could have really broad implications. Yeah. No, this is the key thing, right? And so it's not just FTC. There have been some other instances already in this administration of President Trump removing people who are sort of part of various entities that exist within the federal government, which at least formally in recent administrations have had some notion of independence. And there is this popular sort of conservative legal theory that all of these are kind of illegitimate, that there are three branches of government, judicial, legislative and executive.

4:34There's not really room for these other things that are literally outside the executive. And so what we've seen is this sort of assertion through these removals, firings of the FTC commissioners plus others of this idea like, no, these entities are all under the president. Some of the implications could be pretty big. Right. Well, there is the Federal Reserve, which is an independent agency. And we know there is this populist feeling, let's put it that way, against the Federal Reserve. You know, people think about it as this sort of ivory tower filled with unelected technocrats. Speaking of unelected technocrats, did you see Elon Musk's speech in Wisconsin over the weekend?

5:14I missed that. He was talking about the Fed. Someone asked him, do you plan to do something with the Fed? And he basically said, yeah, and the Fed. And then said in a competition between a magic eight ball and the central bank for interest rates. I don't know exactly what that means, but he said the magic eight ball would win. Well, look, I would just say this. The premise of central bank independence is probably one of the most revered ideas in sort of modern orthodox economics, the premise that we have an independent Fed. There are some critics of that, and there are some sympathetic critics to it.

5:46But I think for Wall Street and how we do econ policy in this country, the premise that the Fed exists independently of immediate direct political control such that it can pursue its two goals, full employment or maximum employment and price stability in a way that's outside the elections, outside of political control, is this sort of core thing that many people take for granted. And there's this building question of whether that will remain so. All right. So a lot to talk about. And we do, in fact, have the perfect guest. We're going to be speaking to a favorite of the show. It's Lev Menand, Columbia Law School professor.

6:24He's also the author of The Fed Unbound, which is a fantastic and quite short book all about the central bank. So if, you know, like Elon Musk, can't figure out what the Fed does and feel that it's absolutely impossible to find out, then you should check out this book and also many, many, many other books. Okay, Lev, it's so nice to have you back. So great to be here. Why are we talking to you? Let's just lay the scene other than you're one of our favorite guests. I think something big is happening in the federal government right now where the president is asserting unprecedented powers over parts of the government that for, in some cases, over a century have operated with a certain amount of separation from presidential day-to-day direction.

7:13And that threatens to upend government policy across a range of dimensions. But in one area in particular, the consequences could be felt immediately, and that is with respect to the Federal Reserve. So I think, you know, certainly the firing of the two minority commissioners at the FTC almost immediately after we recorded that episode or news. I don't think people on Wall Street like really, you know, yeah, OK, something about mergers. That's not really like most people aren't taking, you know, that's not high on their radar. What is the connection between the FTC or that action and something that could happen with the Federal Reserve?

7:53Yeah, let me tell you why that FTC firing was a particularly big deal. There is a Supreme Court case on the question of whether the president can fire commissioners on the FTC without cause, the way Trump asserted the power to do the other day. And that is the bedrock precedent that protects the Federal Reserve. It's called Humphrey's executor. It was decided by the court in 1935, and it reigned in and largely reversed or cabined to its facts a famous decision from 1926 called Myers v. the United States that Roosevelt, President Roosevelt, FDR, had relied on to try to fire a member of the FTC.

8:35And the Supreme Court in 1935 said, nope, you can't do that. That case isn't going to stand for that anymore. And we built up a whole system of government around this understanding. And here Trump is inviting the Supreme Court to overrule this bedrock precedent. So since we already went back in time to 1935 and 1926, can we go even further and talk about why we have independent agencies at all? And, you know, I guess the clue is in the name independent agencies, but they have some oversight, clearly. So who is actually watching over these independent agencies and why do they exist? All the constitutional actors oversee the independent agencies.

9:17Independent agency is a technical term of art in law to refer to an agency whose heads cannot be removed by the president at pleasure. And so they include any officer of the government who is not a legislative officer, a member of Congress elected, or a judicial officer, an appointed Article III judge. All of those officers, some of them can be put into a category of they're part of an executive agency. the head of that agency can be removed by the president at pleasure, or an independent agency, the head of the agency cannot be removed by the president at pleasure. Now, in that second category, independent agencies, they're accountable to the president, to the courts, to the Congress, in all sorts of different ways.

10:02And so the president appoints the heads of independent agencies with the advice and consent of the Senate. The president can remove the heads of independent agencies, but generally only for cause. Sometimes those causes are specified, like neglect of duty or malfeasance in office. We could talk about that. In the Federal Reserve Act, the statute just says cause. And a for-cause removal involves notice and a hearing. And so it's not the same thing as an at-pleasure removal. And it precludes the president from removing somebody for a policy disagreement. The independent agencies are accountable to Congress in that there are hearings that are held.

10:40There are, you know, officers have to go down, just like Jay Powell goes down and testify. They're subject to Congress's subpoena power for records. They're implicated in all the workings of the government and their actions, like the FTC's actions, are subject to judicial review by Article III judges. So they're not independent in this sort of sense that's sometimes asserted that they're like a fourth branch of government or they're outside of the government. No, they're just a type of government body that has a different relationship to the president from the secretary of defense or the White House chief of staff, which are positions where the president can fire or direct the actions of that officer.

11:19Now, these sorts of positions have been around going all the way back to the founding. And with respect to monetary policy, it was a question for the first Congress and the first Secretary of the Treasury how much direction monetary policy should be subject to day-to-day oversight or direction by the president. And so this sort of issue isn't a new issue for the United States. It's there right at the beginning. Thank you.

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13:35Is there any difference legally between the FTC and the Fed? Are they different? Let's say the court says, you know what, we're reversing Humphrey's executor. You can fire them. Is there any reason to think that that exact logic wouldn't apply to the makeup of the FOMC board? This is a great question. I think we should take it in two parts. First, we should just start by understanding the similarities. OK, so the Federal Reserve Board is a board of control for the banking sector, and it was established in 1913. on the model of something called the Interstate Commerce Commission, which was established by Congress in 1887 and primarily oversaw the railroad sector.

14:18The Interstate Commerce Commission is a multi-member body within the executive branch of the government broadly construed, but its heads were not removable by the president at pleasure. They had to be removed only for cause. They were appointed by the president, but could be removed only for cause. Congress created something similar in 1913 for money and banking. The next year, in 1914, they created the Federal Trade Commission for antitrust enforcement. And multiple additional agencies that you guys might be familiar with followed, like the Securities and Exchange Commission in 1933, most notably.

14:56So the Fed has the same basic legal architecture as these other multi-member commissions. It has seven governors, so it's a board of seven members, and those members are all tenured for a term of years. They have office security. The Secretary of the Treasury has no term of office. They are appointed for no particular term and can be removed at any time. The board members all have particular terms and can be removed only for cause. So these are the things that are in common. There is an effort underway, in particular in conservative legal circles and in part in the judicial branch, by those who are interested in overturning Humphrey's executor, to divine, discover, construct some type of Fed exception.

15:44some way to distinguish the Fed constitutionally from these other multi-member commissions, such that were the court to say Humphrey's executor is overruled, it would not necessarily mean the president could fire Jay Powell at pleasure. These efforts are pretty incohate. They're pretty intellectually unsatisfying, but it's worth sort of trying to tease them out because there is a real desire for the court to protect the Fed independence And in trying to understand what's going to happen next, we have to sort of evaluate how plausible it is that the court would be able to embrace some type of rationale for why the Fed is the one independent agency that the president doesn't have the constitutional power to control.

16:33OK, so what are those arguments? Because I remember, for instance, the CFPB, I think when there was like wrangling over its independence and someone mentioned that the CFPB is led by a single leader instead of a commission like the FTC. Would something like that come into play when you're arguing that the Fed should be a special case? Yeah, so great question. This is a slight detour, but I think it's important. The demise of Humphreys executor has been prognosticated for 15 years now. It dates back to a Roberts court decision in 2010 with respect to an organization called the PCAOB, which oversees accountants and is part of the SEC.

17:19And that was struck down. And the court said the Humphreys executor exception to the president's power to oversee the executive branch, we will not extend it to this sort of novel organization that is two layers removed from the president because the PCAOB is under the Securities and Exchange Commission. And there was a lot of language in that opinion that made people think, whoa, these justices don't really agree with Humphrey's executor. They have a different view of the president. What's going to be next? And in 2020, you have the CFPB case that you're referencing, Selah Law, in which the court says, yep, the CFPB, which is a five-year term tenured, single-headed agency, we're not going to extend Humphrey's executor to that either.

18:08And Justice Roberts wrote the opinion and he said, this person has way too much power. The Humphreys executor sort of exception to presidential oversight, as he characterized it, doesn't cover the CFPB. This thing is new. Congress just created it and it's not rooted in history. And people thought, OK, so certain single headed agencies might not be allowed anymore. What's going to happen next? Next year, 2021, the Supreme Court, with Justice Alito writing for the court, decided a case called Collins v. Yellen and struck down the independence of the Federal Housing Finance Administration, FHFA. And there, the court just said, oh, all single-headed agencies, no matter what, no matter how much power they have, are unconstitutional.

18:57And this covers things like the Social Security Administration, which since its inception has been headed by an individual tenured for a six year term. And the idea is SSA administration is nonpartisan and every president shouldn't come in and just put in their own person. But after Collins versus Yellen, President Biden fired the Social Security Administrator. And you got to a point where people were wondering, what about the multi-member commissions themselves that Humphrey's executor was about? Will it no longer be sustained for them either? So what are the possible exceptions that would allow the logic of Humphrey's executor to maybe apply to the Fed, even if it no longer applies to the FTC?

19:42The one that the Trump administration is running with so far is that monetary policy is somehow not sovereign executive power and can be distinguished from the other stuff the Fed does. And that stuff is regulation of financial institutions. So Trump put out an executive order last month, Executive Order 14 to 15, which asserted executive power over all the independent agencies and included specific carve out language for the Fed that said this order doesn't apply to the Fed with respect to its monetary policy, only with respect to its regulation and supervision of financial institutions. OK, so this is sort of the Trump theory.

20:29There's some other options we can get to, but I think let's maybe think through Trump theory. Does this make any sense? There are some huge problems with this theory. It just sort of suggests that they haven't spent a lot of time thinking about how the Fed conducts monetary policy and what the relationship is between monetary policy and the regulation of banks because it's really all one and the same thing. So the court would be hard pressed to say, for example, just as an initial matter, you know, Jay Powell can't be removed by the president with respect to what he's doing on monetary policy.

21:05But with respect to what he's doing on bank regulation, the president could fire him for a policy disagreement. That would just sort of fall apart pretty easily, right? What type of independence is really left? The president could just say, I fired him because I don't like what he was doing on bank regulation. And the real reason could be that he didn't like what Jay Powell was doing on interest rates. But how would we know? Because he doesn't need to give a reason except to say that it's bank regulation. So there's like already a problem. But the deeper problem is monetary policy implementation is bank regulation.

21:35Like in January, when the Fed met in the aftermath of that meeting, the board of governors amended Regulation D through a rulemaking published in the Federal Register, lowering the interest paid on reserve balances to banks with reserve accounts at the Federal Reserve Banks. It is a straight exercise of regulatory power, just like when the SEC writes a rule for what type of disclosure a company has to do if it's a publicly traded company. And they just don't seem to realize this. They think that it's like FOMC just meets and they talk and then they announce a decision and that's monetary policy.

22:23It's not regulatory. It's not adjudicatory. But actually, no, monetary policy implementation is all exercise of government power over the banking system.

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24:40Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com slash disclosure. You know what I do find interesting? Like I think of this concept of the importance of an independent Fed that can pursue both its mandates as this sort of fairly modern idea in economics. But it is interesting that apparently the Congress was actually like way ahead of like econ theory in this setup. Way ahead.

25:08It's kind of fascinating that they sort of intuited this. What I want to go to is if there is this Trump world or conservative world desire to find a way in which Humphrey's executor can be overturned but yet somehow not implicate the structure of the Fed, why should anyone care? Because in the end, all laws are just enforced by humans. And if the general thinking is we're going to read something into this law that even though we can't logically defend it on paper, we all want it to have this outcome. Or all of these independent agencies are formally just part of the executive branch except this one.

25:47If that's the outcome everyone wants, then isn't that the outcome we'll get? That's a great question. The narrow sort of answer, just a law professor's concern, is that creating illogical exceptions to doctrine is bad for law. Law as a social coordinating mechanism, it tears at the fabric of law. Every time someone violates our understanding of what the law is, it's tearing at the fabric of law. So these removals that Trump has engaged in, because there's precedent on point saying you can't do them, this is tearing at law. This is reducing the effectiveness of law as a coordinating mechanism, which is something we should value because it helps us organize our lives in an effective way with minimal social conflict.

26:31So there's sort of just like a narrow concern with contorting, distorting doctrine and law reduces respect for law and its effectiveness. The more persuasive, I think, answer to market participants, you know, who are not like invested in this in sort of law. No, we only care about it. What's going to happen to the stock market, right? I think that every time the court cedes more authority to the president, they call into question their ability and willingness in the future to draw the line. And so if they write an opinion in the FTC case, overruling Humphrey's executor, that says the Fed is an exception and this ruling doesn't apply to the Fed, that will, of course, in this moment, on its face, protect Fed independence.