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