Once taken as a given, the Federal Reserve's independence is facing existential questions in the current political environment.
Former president and Republican presidential nominee Donald Trump
But the renewed incursions — however serious they may be — highlight the precarious nature of the central bank's independence from political interference.
The Fed's insulation from outside political pressures is not guaranteed by a single, explicit document. Rather, it has evolved over time through various pieces of legislation, interagency understandings and the inertia of public and market expectations. But one part of this trusswork, a 70-year-old informal agreement between the central bank and the Treasury Department, is seen as a particularly weak link.
Fed scholars consider the Fed-Treasury Accord of 1951 a touchstone moment in the agency's history, in which the central bank formally cleaved its monetary policymaking power from Treasury's fiscal activities. Some hold the agreement on par with the Federal Reserve Act of 1913 — the statute that created the agency — and the Banking Act of 1935, which crafted its distinct federated structure, in terms of institutional significance.
"It's one of the real pillars of central bank independence in the United States, and one weird aspect of it is that it's an extremely informal document that doesn't have any force of law or anything like that behind it," said David Zaring, a law professor at the University of Pennsylvania's Wharton School of Business. "The Treasury Department could sort of go back on it at any moment, though that might destabilize the financial markets in ways that the White House would quickly come to regret."
Market participants and observers often praise the Fed's independence as a source of strength for the financial system and the country as a whole, keeping government borrowing costs low and prices relatively stable over the long-term.
Fed Chair Jerome Powell has extolled the virtues of the Fed's "operational independence" several times in recent months amid chatter about potential changes that could be coming to the institution.
"This arrangement allows monetary policy decisions to be insulated from short-term political influences," Powell noted in his monetary policy report to Congress last month. "There is broad support for the principles underlying independent monetary policy."
Yet Trump's bluster and open contempt for the Fed's independence call into question the durability of that independence. While the common view is that the White House cannot direct the Fed's monetary moves, some see the Fed-Treasury Accord as proof that it can.
Matt Stoller, director of research at the American Economic Liberties Project, said the arrangement is a testament to how monetary policy was conducted for much of the Fed's history — not just until 1951, but functionally until the late 1970s. He added that it also exemplifies the fragility of the Fed's independence.
"The Fed-Treasury Accord and Federal Reserve independence are just vibes-based," Stoller said. "There's no law when it comes to the Fed, in all honesty; they do what they want, and then they justify it afterwards. If they don't want to do it, they say they don't have the authority, but if they want to do it, they can find the authority."
The public face of the Fed-Treasury Accord is a 48-word statement announcing that the Fed and Treasury had come to an agreement about how to manage the national debt and monetary policy. The specifics of that arrangement are not spelled out, but rather have been inferred over time, based on subsequent moves by the key players involved.
Peter Conti-Brown, a leading scholar on the Federal Reserve System, described the arrangement in his 2016 book "The Power and Independence of the Federal Reserve" as a truce between the Truman administration and former Fed Chair Marriner Eccles, who had been at odds over how to finance the government's war effort in Korea. The president wanted the Fed to maintain low yields on government bonds while Eccles believed it was time to shift the Fed's focus toward reining in inflation.
Others see the agreement as a capitulation by the Treasury to secure short-term participation by the Fed in its war financing efforts. Karen Petrou, founder of Federal Financial Analytics and highly regarded expert on financial policy, said the accord amounted to an acknowledgment by the Treasury that it never had the ability to force the Fed's hand.
"It was essentially Appomattox for the Treasury Department," Petrou said, referring to the Confederate surrender in the Civil War. "They had to sign it."
The durability of the Fed-Treasury Accord is up for debate. Some say the document is only good until one side stops honoring it, but Zaring said the continued adherence to it could have created a legal precedent through a process known as "constitutional liquidation," in which practical interpretations of law are solidified over time.
"This idea is a bit uncomfortable, because why does this weird, short memo represent the start of true Federal Reserve independence?" Zaring said. "And yet, ever since then, the principles set forth in that memo, that the Fed doesn't consult with the executive branch on monetary policy, have not just been jealously guarded by the Fed, but honored by the executive branch. The idea is that you can't just rewrite that."
The narrow focus of the accord — the pricing of government debt — has largely been rendered moot by capital market developments in recent years. While the Fed still holds a large share of the U.S. debt through its $4 trillion-plus Treasury securities portfolio, the value of that debt is largely set on a market basis. So while Trump has groused in the past about the Fed's impact on the cost of servicing the national debt, the central bank alone could only do so much to influence pricing.
Also, subsequent acts of Congress have bolstered the Fed's authority over monetary policy. The Full Employment and Balanced Growth Act of 1978, also known as the Humphrey-Hawkins Act, established what has become known as the Fed's dual mandate of full employment and stable prices.
Still, change is on the menu, both for Trump and organizations aligned with him politically. The Heritage Foundation, which
"The Fed's independence, in a Trump/GOP victory, will be under acute attack, with progressive Democrats, very often siding with the populist Republicans," Petrou said, noting that while some of that change would come through the "slow motion process of appointments", most would come through various bills that have already been introduced to "restrict the Fed's authority and discretion, both in regulatory and monetary policy arenas."
Powell has said the hostile rhetoric and legislation against the Fed has come from a small contingent of lawmakers,
"Support for the Fed's independence is very high where it really matters — on Capitol Hill, in both political parties, among the leaders and most of the following," Powell said last month.
But that congressional support may not go as far as it once did. Stoller, a former advisor to the Senate Banking Committee and a House Financial Services Committee staffer during the 2008 financial crisis, said members of Congress are steadily showing less deference to the Fed and its independence.
"The political environment is such that, if you have enough members of the Senate who believe in the independence of the Fed, the Fed is untouchable. The risk is that they're not going to have that protection for that much longer," Stoller said. "You're seeing a re-examination of the [Federal Trade Commission],
