If Fed independence is important, emancipate it from the White House

Bloomberg News

The United States Constitution has been amended 27 times since it was first ratified in 1788. That may or may not seem like a lot, depending on how you look at it — on average, the United States adopts an amendment to the Constitution every ten years or so, which would seem like an infrequent but regular occurrence. 

But in practice the United States tends to change the rules of our self-government sparingly, with most of those amendments coming in clusters during periods of social upheaval. The first ten amendments — actually, there were twelve — were passed by the first Congress in 1789, the most pressing ten of which were ratified by the states in 1791 while another was passed a couple of centuries later in 1992 through the dogged efforts of one determined political science major. The 13th, 14th and 15th amendments — also very consequential — were only ratified in the wake of the Civil War. Another cluster of amendments, including one establishing the income tax and guaranteeing women's right to vote, were ratified in the early 20th century in an era of profound social change. Many of the rest of the amendments adopted in the 20th century are relatively small-bore affairs — allowing residents of Washington, D.C. to vote for president, limiting presidential terms to two and lowering the voting age to 18, for example.

All of this is to say that constitutional amendments seem to be ratified either after intense rhetorical — or in many cases literal — battles, or because the proposed amendment is a straightforward enough solution to a pressing political problem that it has no real opponents. Amendments, in political terms, tend to be either very big or very small, and the small ones tend to codify changes that are narrow, broadly popular and/or ensure a status quo to which the public has become accustomed. 

With that context in mind, let us consider the institutional independence of the United States' central bank, the Federal Reserve. The Fed was established in 1913 and evolved over time into a unique decentralized structure, which includes both control at the board of governors level and decentralized nodes of power distributed across the land, both of which have voting power in setting interest rates. This arrangement — which relies on both formal and informal policies — is admittedly elaborate, but it has the effect of insulating interest rate decisions from the presidency or from Congress, which empowers the central bank to make unpopular monetary policy choices and politicians from direct responsibility for those choices.

But not everyone sees this arrangement as favorably as I do — and, indeed, as most economists do. Republican presidential nominee and former President Donald Trump and his vice presidential running mate, Sen. J.D. Vance, R-Ohio, have recently floated the idea that the president should have a more direct hand in setting monetary policy. There is little detail on what that would amount to in practice, and at any rate Trump musing about leaning harder on the Fed is nothing new. But those musings dovetail nicely with a rising popularity of something called the "unitary executive theory" of the Constitution among sitting members of the Supreme Court, which holds that as chief executive of the United States, the president personally wields all of the powers delegated to the executive branch — possibly including the establishment of monetary policy.

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The Supreme Court, as I've noted before, does not actually seem eager to dismantle the Federal Reserve's independence or the existence of other similarly independent agencies. But the tension in the Fed's status as an executive agency with a twist is tenuous and places it in a legally liminal space where its independence — that is, its ability to function without interference from other branches of government save for prescribed checks and balances — depends on the Supreme Court, the president and Congress to continue to observe that independence. And some banking trade groups are intent on having the high court once again look under the hood of the Consumer Financial Protection Bureau's founding tether to the central bank, giving the justices a new opportunity to rethink how and whether executive power can be delegated.

A constitutional amendment defining the Federal Reserve as an independent branch of government — distinct from the executive, judiciary and legislative branches — would confer onto the central bank an independence of judgment that other branches cannot take away. Such a proposal, depending on how it is worded, could either be very small or very big, and the type of amendment I have in mind here would be politically small. In essence, it would enshrine the Federal Open Market Committee as an independent branch of government, and that's it. Congress would still have the power to determine the makeup and rules of the FOMC just as it has considerable power to determine the makeup and rules of the Supreme Court; the executive branch would name members of the Fed Board just as they do today. But as to the question of what monetary policy would be on a day-to-day basis, that would be solely in the hands of those voting members.

While I can envision a world in which such an amendment would be politically straightforward, very little ever is when it comes to the Fed. Disentangling the Fed's monetary policy functions from its regulatory or even participatory functions would be difficult — whether a president could fire a Fed board governor at will for regulatory policy issues but not for monetary policy ones is one dilemma that comes to mind. 

But the bigger problem is that the public enjoys the benefits of central bank independence while remaining skeptical of the institution itself. Changing the Constitution is difficult to do by design — it only is achieved with broad public support and muted public opposition, and as of right now that kind of public support isn't forthcoming. 

But the public also has a tendency to miss things when they're gone. To wit, the 18th Amendment prohibiting the manufacture and sale of alcohol was passed with broad public support, only to be repealed by the 21st Amendment 13 years later. Unfortunately, reasserting an independent Fed once we've lost the one we already have may not be so easy.