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The recent activity between the Federal
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Reserve and the White House has the
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question of Fed independence being
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brought up yet again. And now the
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questions revolve around that what that
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relationship should look like. Is it
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good as it is right now or are there
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tweaks to be needed? Pleasure to be
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joined to speak about this with David
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Zaring who is a professor of legal
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studies and business ethics here at the
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Wharton School. Hi David, great to talk
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again. How are you?
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>> Good. Good. Uh great to be here again.
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It has been certainly an interesting
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last few months to see this play out as
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this has all kind of developed. What
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have been your thoughts on where the Fed
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stands and obviously the concern about
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maybe not having the independence that
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it it has historically had.
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>> That's right. The Fed's independence
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isn't on the legally strongest footing
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you could possibly imagine. Um and
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certainly um recently there's been an
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effort to give the president a lot more
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control over sort of oversight remote
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areas of the administrative state and
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and the question has always been is that
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going to uh include the Fed which um uh
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people often talk about how important it
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is to maintain its independence and uh
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in the you know last few decades it's
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being able to set monetary policy really
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without much regard to political
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oversight.
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And that's led to low inflation um uh
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for most of this period since the 1980s
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with the very notable exception of what
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happened after the coronairus crisis.
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Uh but with that blip um the Fed is
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being pretty good about keeping um
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unemployment low and inflation low and
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and that's what it is being charged to
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do and and one of the reasons it's being
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able to do that is because it hasn't had
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to worry about you know what's going to
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happen in the next election and how
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should we think about that? Um, and that
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is the kind of thing that happens if
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you're going to talk about uh political
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oversight of the Fed and its monetary
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policy decision-m
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>> and historically the Federal Reserve has
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done a very good job. It seems like as
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an independent body, correct?
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>> It does have a pretty good track record.
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Like I said, the period between 2020 and
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1980 was really low inflation and pretty
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high growth. And that's um that's an
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admirable record. Uh the Fed has always
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had to deal with presidents who would
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like it to pursue a different monetary
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policy. And there were years um the
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years before the Great Depression and
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between the founding of the Fed in 1913
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and the Great Depression where the
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Treasury Secretary was on the board of
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governors of the Federal Reserve and and
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that obviously added a political
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dimension to the way the Fed did
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monetary policy before then. and
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Congress amended the statute to move the
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Treasury Secretary off the board of
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governors and and try to make it a sort
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of more independent bipartisan
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institution. And and of course a lot of
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the discussion right now is uh whether
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or not the president of the United
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States, not necessarily this president
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but a president would have the ability
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to make changes in terms of the
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leadership uh of the Federal Reserve
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without having cause I guess you know
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just on basically the whim of what he
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would like to see from a policy
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perspective.
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>> That's right. The Fed um like a lot of
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independent government agencies has for
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cause removal protections written into
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the statute. Um unlike a number of other
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agencies, the statute doesn't define
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what cause is. Um other agencies it's
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it's uh malfeasants, neglect of office,
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um that kind of thing. And we don't know
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what the feds for cause protections
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exactly protect. Um but we do know that
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um with the possible exception of a case
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in uh 1951 where the President Truman
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told the chair of the Federal Reserve
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he'd lost confidence in him. The Federal
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Reserve chair at the time then shortly
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after hearing this from the president
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did resign. So was that a four cause
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removal? I'm not sure. Um but he
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resigned after he told that the he he
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was told that the president didn't have
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confidence in him. And that's the only
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time where um a federal um member of the
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board of governors has gone in the past
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and um it's never really been tested as
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to whether they can be removed for any
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reason that the president wants um
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including the desire to have lower
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interest rates. When you talk about
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independence and the Fed, obviously
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we're talking about in this discussion,
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but central banks in general,
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put in perspective the importance of
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having that independence when you think
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about monetary policy and trying to make
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sure that an economy runs as smoothly as
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it potentially could.
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>> Yes. Now, here's where I should say that
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I'm I'm just a country lawyer from Iowa,
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um not an economist. Um uh and um I
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think economists are a little more
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measured than they used to be about
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central bank independence which they
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overwhelmingly think is important in
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general. It hasn't been established very
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clearly that if you get yourself an
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independent central bank and independent
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monetary policy that makes everyone
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richer. It is however the case that
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people think that if there's an
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independent central bank that sets
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monetary policy, you know, outside of
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political oversight, you get lower
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inflation. Um, and uh, people really
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hate inflation. So if if inflation is
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what you're worried about, then what you
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want is an independent central bank um
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that isn't um overseen by politicians
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who may be worried about the next
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election. and so want low interest rates
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with the idea that that'll juice growth
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and the inflation that follows from
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juiced growth is something they won't
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have to worry about um because um they
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won't be around when the you know sort
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of bill comes due for low interest rates
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juicing economic growth
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>> but from a legal perspective if a
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president were to make such moves then I
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guess the expectation is there would be
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legal challenges that would follow
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probably from those individuals who are
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being removed uh maybe potentially all
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the way up to the Supreme Court. I would
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I would assume
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>> I think that's right. Um it's uh really
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high profile these uh um efforts to
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either get the Fed to change its
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monetary policy or to change the
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personnel who are making those monetary
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policy decisions. the uh Fed has
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indicated that it uh believes that
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legally the president can't remove uh
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the chair or members of the board of
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governors. Um and so I expect that um if
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that kind of thing happens that you're
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going to see litigation and in fact I
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think we are seeing litigation. Um and
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it's likely that the courts will have to
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weigh in on this. The Supreme Court
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itself will probably have to weigh in on
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it if it gets to that level. And by the
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way, it's already said something about
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this issue. It it said in another order
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that while it's comfortable with the
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removal of other uh members of federal
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agencies for any reason uh even with
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their four cause protections they think
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the need to have presidential political
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supervision over those agencies is more
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important than their need to be
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insulated from politics. Um but it said
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it said the Fed is different. Um, and so
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the Supreme Court's already a little bit
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on record as to saying we think Fed
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independence is more important than, you
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know, the independence of something like
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the National Labor Relations Board.
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>> And I'll finish up on this then. If
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there if the four cause provision is
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somewhat cloudy at times, does that need
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to be cleared up a little bit further as
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we move forward here because of
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seemingly what appears to be
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challenges being brought forward? But
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what we could see is challenges coming
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down the road.
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>> I think that's right. Um and I think
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that if Congress really wanted to
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preserve Fed independence, they ought to
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pass a statute that explicitly makes
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clear what's going on right now. We're
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relying on something from 1913 that
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really isn't very clear as to what's
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covered and what isn't. Um now, you
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never want to bet on Congress taking up
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legislation that would be a great idea.
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Um but um you know that's the kind of
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thing that would clarify what exactly
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Fed independence is and then you know it
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could be that there's a political desire
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for more oversight of the Fed then that
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might lead to inflation but if that's
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what Congress and the president want to
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do then they could write that into the
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law and that might be a good idea.
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>> David great to talk to you as always.
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Thanks very much. All the best.
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>> I appreciate it.
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>> Thank you. David Zaring who's a
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professor of legal studies and business
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ethics here at the Wharton School.
