The Growing Risk to Fed Independence That Wall St Isn't Watching
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Hello and welcome to another episode of the All Thoughts Podcast. I'm Traci Alloway. And I'm Joe Weisenthal. 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 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. Yeah. 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. All 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 dissents. I wrote 400 plus pages of dissents during my time as a minority commissioner. I 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 accusation.

And

And the interesting thing here is I know it seems like a very niche topic. Why 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. Right.

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. There'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 that,

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. That's right. It's 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?

I 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 and sort of modern orthodox economics, the premise that we have an independent event. There are some critics of it and there are some like sympathetic critics to it. But I think for like 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. He'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. And 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 were 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? Yeah, 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 cabinet to its facts in

A famous decision from 1926 called Myers versus the United States that Roosevelt, President Roosevelt, FDR, had relied on to try to fire a member of the FTC. And the Supreme Court in 1935 said, nope, you can't do that. That case isn't going to stand for that anymore. And we've 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. Independent 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. And 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. Their 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. Now, these sorts of positions have been around going all the way back to the founding of

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. ♪

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Money Movement Services by Intuit Payments, Inc., licensed by NYDFS. Is 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 contract.

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.

The 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. So 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, some 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 inchoate. 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. Okay, 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?

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 Humphrey's 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. And 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, Saylor Law.

in which the court says, "Yup, the CFPB, which is a five-year term tenured single-headed agency, we're not going to extend Humphrey's executor to that either." And Justice Roberts wrote the opinion and he said, "This person has way too much power. The Humphrey's executor sort of exception to presidential oversight as he characterized it doesn't cover the CFPB. This thing is new. Congress just created it."

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. And 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?

The 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 14215, 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. Okay?

OK, so this is sort of the Trump theory. There'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 in 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, but 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. Like in January, when the Fed met in the aftermath of that meeting, the Board of Governors amended Regulation D-1.

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. It'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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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. And it'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 wanted to have this outcome where all of these independent agencies are formally just part of the executive branch, except this one. If 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, you know, 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. So 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 if

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.

But now that we've moved the line 2010, 2020, 2021, and then again, more and more towards the president, we invite the president to test this new exception. And there's a number of ways the president might do it. And in a year from now or two years from now, the only organization left is the Fed and

And the Fed's ability to stand on its own may be limited. And as people become aware of that and see the pressure that the president will exert on the Fed as the only remaining exception, the independents will dissipate and markets will react. And the Fed's ability to make credible commitments to maintain price stability over time could be impaired right now.

By the way, Tracy, I just want to give a quick shout out to Matt Stoller, who wrote a great blog post a couple of weeks ago about this sort of thing. And he cited a footnote from Alito in a dissent on the CFPB in which Alito himself said,

The Fed, quote, should be regarded as a special arrangement sanctioned by history. Yes. A unique institution with unique historical background to which Stoller said, this is the legal logic of a souvenir T-shirt that says, I'm the mommy, that's why. Yes. So I just want to give a shout out to Matt because this is what really, this piece was actually sort of what put a bunch of this sort of

In my head. Yes. Amazing. So I have a question. How well defined or codified is the at cause portion of this? Because I'm thinking like, OK, we could do all this. We go through the Supreme Court. But could Trump just come up with a new reason that counts as at cause? And that might be an easier way to exert. Inflation was too high. Yeah. Yeah.

Yes. So that's one of the concerns that I have. If you preserve this exception just for the Fed, you're inviting a challenge. Now the Fed is the only for-cause protected agency, and the president has almost never removed anyone for cause. The last time was over 100 years ago. And so there's very little doctrine on that. You invite the president to assert

a cause and challenge the courts to say that it doesn't qualify. And because the jurisprudence is so thin, it will be hard and people won't know how the court will come out on that and the harm will already be done, right? Jay Powell will have been removed. It will be chaos. We will be litigating over this question all the way up to the Supreme Court.

The beauty of maintaining the line in Humphrey's executor is we never have the fight on the terrain of the Federal Reserve.

The fight is somewhere else. Once you move the line all the way up to the Federal Reserve, the war will be on the train of the Fed. And in some ways, that's a loss already. So you say, OK, there's this conservative jurisprudence that they want to come up with ways to justify all of these agencies are somewhat illegitimate with the except the Fed. Do you actually believe that?

that that is the end goal, that all of these agencies are subsumed to the president except the Fed? Or do you think this is an intermediate step to then get to the Fed? But at this point, they can't argue the full thing because that would freak people out too much. There's a split amongst conservative legal movement

And I think there are some people who want the full thing, and there are some who want to protect the Fed. And I think there's a good reason to put Justice Alito, for example, in the camp of the endgame being we exempt the Fed. And Justice Alito in that dissent in the Community Financial Services case, which came out last spring—

In footnote 16, which you referenced, Justice Alito is speaking to his colleagues. He is telling them, we should overturn Humphrey's executor. I've figured out a way to do it without hurting the Fed. We're just going to claim that it's a unique institution sanctioned by history. Of course, all of these independent agencies are unique institutions. And Congress crafted these particular governance arrangements because of the particularity

particular dynamics in each area. And so there's a fundamental illogic to Alito's effort. At the same time, he's just trying to say, if we just say it's a special situation and it's unique, we can get this outcome that we want, which is

No independent agencies where these agencies are engaged in policymaking that is sort of constraining market activity. And yes, independent agency for the Federal Reserve, where we're particularly worried about excessive money creation, which is a pro-debtor, you know,

creditor-unfriendly policy. And so it's just sort of you're importing your policy preferences into some attempt to reconstruct the administrative state to sort of protect your interests and get the policy you want across the board. I think it's an untenable sort of outcome in some ways, but it's very much what a lot of people who subscribe to the unitary executive theory are trying to achieve.

So this has been a fantastic overview of what's at stake. What should we be watching going forward? What are you watching? So there are a bunch of cases right now making their way through the federal courts

that began with Trump illegally firing independent agency heads. So right on January 27th, shortly after taking office, Trump purported to remove the head of the National Labor Relations Board. And that led to a lawsuit where Wilcox is seeking reinstatement and a judicial judgment that she cannot be removed except for cause.

That case is making its way through. And then another case involving the Merit Systems Protection Board is making its way through. And now the FTC case is making its way through. And those first two cases on Friday, so just a few days ago, an important thing happened, which is a panel of the D.C. Circuit Court of Appeals, which is like the second highest court in the land, a panel of the D.C. Circuit Court of Appeals embraced Trump's legal theory.

and overruled a district judge who had ruled on those cases earlier in favor of Wilcox and Harris.

Now, the parties in that case are going to ask the full D.C. Circuit to reconsider the panel's decision. And shortly thereafter, inevitably, no matter what happens with that, the parties will seek review by the Supreme Court, an emergency review. And so the Supreme Court is going to potentially be drawn into this in the coming days.

And whatever the Supreme Court does in the coming days, it is possible that one or more justices will dissent from the Supreme Court's decision with respect to the emergency application and say something about what they think the future of Humphrey's executor is going to be. And so we could get real tea leaves very soon in some of the cases that are already proceeding.

I'm really glad we talked to you today. That was riveting. That was so good. Love. Thank you so much for coming back on all thoughts. Thank you for having me.

Joe, that was such a good overview. It really was. And I didn't realize that stuff was going to happen potentially on this so quickly. So really good timing on our part, patting ourselves on the back. By the way, Lev left us with some homework, some assigned reading. He says we should look up Hamilton's report on a national bank.

Yes, apparently that is some good reading for background on why Congress intuited to have an independent Federal Reserve even before the academic economics profession sort of understood central bank independence as a key thing. I was listening. I don't know if it's like the trial lawyer equivalent.

of constitutional law, you know, because it's like most conversations about constitutional law do not sound like, you know, a lawyer giving an opening statement. But I feel like Lev can like really blend the two. Oh, absolutely. By the way, for people who, well, everyone who wasn't in the studio, you kind of missed Lev's gesticulations, wild gesticulations, but they are very, very effective. I think you could kind of hear them. Yeah, you can hear it in his voice. All right. Shall we leave it there?

Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Joe Wiesenthal. You can follow me at The Stalwart. Follow Lev Menand at Lev Menand. Follow our producers, Carmen Rodriguez at Carmen Armit, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks.

For more Odd Lots content, go to bloomberg.com slash oddlots, where we have all of our episodes and a daily newsletter. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash oddlots.

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