Federal Reserve officials are battling to maintain their political independence on monetary policy, but the same cannot be said for their regulatory and supervisory authorities.
Instead, central bank officials have downplayed their ability to set their own banking oversight policies rather than boisterously defend it from the Trump administration's efforts to
Some policy analysts and observers see the Fed's disparate treatment of its authorities as a pragmatic choice. Facing pressure on multiple fronts, Karen Petrou, managing partner at Federal Financial Analytics, said the Fed was wise to bolster its monetary independence — and fortunate to have had it explicitly exempted from the Trump administration's overtures.
"The Fed is lucky to have maintained the Trump administration's agreement to its monetary policy independence in the executive order the president issued on that point," Petrou said, referring to a
Petrou added that the legislative history and the academic literature that establish and justify the Fed's monetary independence do not clearly apply to its regulatory and supervisory functions.
"Their independence for supervision dates to a period in which the principal concern was that bank examiners would sanction or favor banks based on [favoritism], and that remains a concern," Petrou said. "But I don't think that the kinds of rules that redefine macroeconomic growth or the competitive landscape, like the capital rules, or that pose systemic risk, like supervision, should be immune."
The Federal Reserve Board declined to comment for this article.
Others steeped in the issue say bank oversight independence has served the Federal Reserve and the banking system well, and should not be forsaken.
Jeffrey Lacker, former president of the Federal Reserve Bank of Richmond, said the Fed's oversight autonomy has more often than not made it a stabilizing force in the bank regulatory environment, as it has historically been less prone to politically-driven shifts in policy than the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
"There is a reason why they set up the Fed, FDIC and OCC as independent agencies — there was a desire for continuity across administrations, across elections," Lacker said. "I don't think independence of regulatory policy should be dispensed with lightly."
There is also the matter of the law, which is not entirely clear. Under the Constitution, Congress is given explicit authority over the money supply. Congress then, in turn, delegated that authority to the Federal Reserve, an arrangement that clearly makes the central bank's monetary policy functions separate from the executive branch, said Andrew Levin, a Dartmouth University economics professor and former Fed staffer.
But with that being said, matters of banking oversight and policy have traditionally been led by executive agencies, Levin said.
"In principle, when the Federal Reserve was created, it wasn't to supervise banks or regulate banks — it was to be a banker to banks, to provide financial stability," Levin said. "It was given some supervisory responsibility, but in the Federal Reserve Act, it specifically says whenever there's a conflict between the Federal Reserve and the Treasury Department on regulation and supervision, it shall defer to the Treasury. There were no ifs, ands or buts."
Under the Federal Reserve Board's original 1913 construct, the secretary of the Treasury and the comptroller of the currency were members of the board, with the secretary serving as chair. That was changed by the Banking Act of 1935.
Levin said various compromises that went into forming and reforming the Federal Reserve Board and its responsibilities have left it with a messy and conflicted structure.
"The Fed has two bosses — its boss on monetary policy is Congress, and its boss on supervision and regulation is the president and the Treasury department," Levin said. "That's not a very good arrangement."
For its part, the Fed has long maintained that it is accountable solely to Congress. If that legal interpretation is correct it would imply that the Fed's independence from the executive applies to all its activities.
Former Federal Reserve Bank of Kansas City President and FDIC director Thomas Hoenig said it is his belief that regulation and supervision have always fallen under the umbrella of Fed independence.
"The independence of the Fed board is determined by the appointment process. Once appointed, an individual could not be removed without cause. I don't know that the statute carves out supervision or payments as subject to executive branch control while its monetary policy responsibility is not, so long as the Fed and its board act within the law," Hoenig said. "However, it looks like that is not how the Fed — or, so far, the executive branch — sees things."
Earlier this year, then-Vice Chair for Supervision Michael Barr
Barr maintained that he
Trump's choice to replace him, Fed Gov. Michelle Bowman, solidified the Fed's shift away from defending its oversight independence.
Bowman
"That's a question that I focus on often, which is that we should be applying similar requirements across the prudential regulators and holding banks to standards that are transparent and clear," Bowman said. "So to the extent that we can work together with our other regulators … I think that's an important and appropriate focus and goal that we could accomplish."
Bowman's response mirrors the
Bessent's stance is bolstered by
"I agree with the principles of cost-benefit analysis and ensuring that we've identified a problem that needs to be solved and that we need to provide an analysis that supports rulemakings that we put forward," she said. "So, I wouldn't think that we would have challenges with any rulemakings that we might like to engage in."
For banks, all these developments appear to be
But there are also many unknowns about what this approach to banking oversight will mean in practice — including how prescriptive Bessent is when engaging with bank regulators on interagency rulemakings. Likewise, it is unclear where or how the Fed will draw lines between its monetary activities and other adjacent functions, such as operating the discount window or managing its balance sheet.
Daniel Hartman, a lawyer with the law firm Nutter McClennan & Fish and a former counsel for the Federal Reserve Bank of Boston, said the details of the arrangement will have to be revealed over time.
"We'll start to see where those gray areas are, as we look to see what actions they take," Hartman said. "The plan is to stay short of that gray area. And I should say I don't know if we'll see where gray areas are. They may steer clear of them."
