The footnote that just might save Fed independence
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Illustration: Aïda Amer/Axios
Since President Trump's executive order claiming new power over historically independent federal agencies this week, Fed watchers have been trying to parse what it means for America's central bank.
- Some answers can be found in the law that created the Fed, plus a legal footnote.
Why it matters: The Fed's independence from direct political influence is more deeply established in law and precedent than some of the discussion around Trump's assertion of power might suggest.
Catch up quick: This week's executive order states that independent agencies must submit proposed regulations to the White House for approval and have their leaders accountable to the Office of Management and Budget's director.
- The OMB director is also granted the authority to withhold funding from agencies to ensure they are complying with the president's agenda.
- The order did carve out the Fed's monetary policy responsibilities as exempt from White House control — though as a choice by Trump, not a constraint under law.
Yes, but: The Federal Reserve Act — passed by Congress 112 years ago and amended many times since — describes clear authorities for the Fed's Board of Governors, making no mention of White House review.
- "The Board shall determine and prescribe the manner in which its obligations shall be incurred and its disbursements and expenses allowed and paid," says Section 10 of the law. Translation: The Fed sets its own budget.
- The law lays out a series of authorities held by the board, sets the structure of hybrid public-private reserve banks across the country, and empowers the Federal Open Market Committee to set monetary policy.
State of play: Trump's executive order is based on a constitutional argument — "Article II of the U.S. Constitution vests all executive power in the President," says a White House fact sheet, "meaning that all executive branch officials and employees are subject to his supervision."
- If the administration seeks to deploy this constitutional argument to override the Federal Reserve Act and Fed leadership defends its legal prerogatives, it would set up a collision course at the Supreme Court.
- Then the question becomes, "What would the court do?"
Last year, the Supreme Court ruled that the unusual funding structure of the Consumer Financial Protection Bureau — receiving funds from the Fed rather than Congressional appropriations — is constitutional.
The intrigue: In a dissenting opinion, Justice Samuel Alito included a footnote differentiating the CFPB structure from that of the Fed.
- The Board "is a unique institution with a unique historical background," dating to the founding of the republic. Its structure is the result of decades of financial panics in the 19th century and an "intensely-bargained compromise" between those who wanted a private system versus one under government control.
- Therefore, Alito wrote, "the funding of the Federal Reserve Board should be regarded as a special arrangement sanctioned by history."
What they're saying: "The Court majority favors bolstering executive power," George Washington University political scientist Sarah Binder tells Axios. But in previous decisions, "the majority seemed to recognize that messing with the Fed's autonomy to set the cost of money might actually be worth protecting from presidential incursion."
- But, Binder says, as the court shifts toward more deference to presidential authority, "the Fed can't be confident that the Court will come to its defense."
The bottom line: As of nine months ago, one of the Supreme Court's most conservative justices seemed to view the Fed's unusual structure and independence from the rest of the government as passing constitutional muster.
Editor's Note: This story has been corrected to reflect that the Supreme Court found the CFPB's funding structure constitutional (not unconstitutional); and that Justice Alito's was a dissenting (not a majority) opinion.
