The Federal Reserve (“Fed”) is arguably the most powerful administrative agency to ever exist. Its decisions touch every facet of life, from the cost of your mortgage to the stability of the global financial system. Consequently, for decades, the Fed has enjoyed policy independence from the executive branch.  This independence largely comes from the Federal Reserve Act, which prevents the President from firing its officers at will.

Yet, President Trump has recently fired officers with similar statutory removal protections at independent agencies like the EEOC, FTC, MSPB, NCUA, and NLRB.  His administration argues these protections are unconstitutional because they interfere with the President’s ability to carry out his constitutional roles under Article II.  True, a 1935 Supreme Court case, Humphrey’s Executor, upheld statutory removal protections as constitutional.  But since 2010, the current Court has whittled down this “exception.”  And it has hinted it will go even further by upholding these latest firings too.

Despite this clear tension, the Supreme Court stated that these latest firings will not implicate the Fed.  Why?  Because the Fed is “a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.”  So maybe the Fed has a sufficient historical analog to some Founding-era institution?  Or maybe – as Professor William Baude suggests in the New York Times – the Fed does not exercise executive power like traditional administrative agencies?

My recent draft article, “The Federal Reserve Exception,” joins other scholars in arguing that neither explanation can logically protect only the Fed (while overruling the rest of Humphrey’s Executor).  And the Court’s latest attempt to make such an exception (even if normatively desirable) is ultimately insufficient.

Is the Fed sufficiently historical?

One idea is that the Founders created institutions similar to the Fed that were independent, such as the First and Second Banks of the United States (as Chief Justice Roberts and Justice Alito have suggested) or the Sinking Fund Commission (as Professor Christine Kexel Chabot has suggested).  Since the Fed is closely analogous, the argument goes, then the Fed is just “follow[ing] in th[is] distinct historical tradition.”

It is true that the First and Second Banks were very independent.  They were government-chartered corporations.  The President could appoint none of the directors for the First Bank and only five (out of twenty-five) directors of the Second Bank.  It is also true that the First and Second Banks performed some similar roles to the Fed, including facilitating a uniform currency and serving as the government’s depository.  They even pushed private banks to lend less aggressively.  (They also performed different roles like directly lending to the government and corporations, which the Fed does not do today.) 

But when it comes to monetary policy, neither Bank really performed this function.  From 1792 to 1862, the United States operated under a metallic currency standard (of silver and gold).  In theory, the money supply had to be proportional to the amount of gold and silver in the country (as banknotes were convertible into specie).  In contrast, the modern Fed can create its own money without such physical constraints.  Nor did either Bank modify interest rates (their interest rates were capped) or conduct “open market operations” (they were not allowed to buy or sell government debt).  Nor, as Professor Jane Ellen Knodell has detailed extensively, were they true lenders of last resort in the way the Fed is today.

Perhaps the Sinking Fund Commission is a better fit.  In 1790, Congress created the Sinking Fund to buy and sell government debt, which on its face looks like open market operations.  However, Congress created the Sinking Fund to refinance existing debt, not to influence bank lending or achieve macroeconomic goals like maximum employment, stable prices, or moderate long-term interest rates.

If the Court accepts these early institutions as historical parallels, it’s unclear where the line would be drawn.  At the very least, if these institutions legitimize the Fed, they should also justify independence for many other bank regulators, like the FDIC, that affect how banks lend.  They also should plausibly justify all other financial system regulators, like the CFTC, CFPB, FHFA, NCUA, and SEC.

Is the Fed sufficiently unique or anomalous?

The article also addresses several arguments that the Fed may be anomalous (as then-Judge Kavanaugh once argued) because of its “special functions in setting monetary policy and stabilizing financial markets.”  This article addresses in full problems with the specific proposals by Professors Aditya Bamzai and Aaron Nielson and Brian Galle and Aziz Huq to try to add more meat to this argument. 

The most fundamental problem with such an approach is the difficulty in defining what constitutes “monetary policy.” The Constitution does not define “monetary policy.”  And even the Fed’s goals and tools have evolved considerably since its founding in 1913. Its statutory mandate didn’t include price stability, maximum employment, and moderate long-term interest rates until 1977. Its primary toolkit has shifted from lending through the discount window, to open market operations, to regulatory tools like reserve requirements and credit regulations, back to open market operations, and now to its current reliance on interest on reserve balances (IORB) and overnight reverse repurchase agreements (ON-RRP).

If the Court creates a “monetary policy” exception, what is the limit on what the Fed can do while remaining independent? Must it be frozen in time with its 2025 goals and tools, or can it adapt to future challenges as Congress sees fit? This definitional malleability makes carving out a consistent functional exception extremely challenging.

Why the Current “Exception” Is Insufficient

One reaction to the above may be that it’s just great that the Court acknowledged this exception in Trump v. Wilcox.  We should not be poking holes in the only thing defending the Fed and its independence from presidential oversight (especially in this day and age)—even if it is poorly reasoned. 

However, creating an illogical exception still leaves the Fed exposed.  President Trump has grown increasingly frustrated with the current Chair, Jerome Powell.  In April, he publicly considered firing him.  And reports indicate that a team of White House lawyers was even tasked to explore this issue in depth.  While he later walked back his initial threat, he still continues to criticize the Fed, recently noting that he “may have to force something.”  Even if President Trump ultimately does not do so himself, the political Overton window has potentially shifted for good, inspiring a future President to try to test the strength of this exception.

Benjamin Dinovelli is an Academic Fellow at the Vanderbilt Policy Accelerator at Vanderbilt Law School.