Notice & Comment

Maybe the Federal Reserve Banks Are Constitutional After All, by Daniel Hemel

Thanks to Chris Walker for organizing this online symposium, to the editors of the Yale Journal on Regulation for hosting it on their site, and—most of all—to Peter Conti-Brown for writing a brilliant book. In this post, I’ll take issue with one of Peter’s conclusions—that “the [Federal] Reserve Banks are almost certainly unconstitutional” (p. 107)—but my quibble with a single claim does not detract from my admiration for Peter’s remarkable work. Anyone with the slightest interest in the Federal Reserve System should read Peter’s book right away. And if one has zero interest in the Federal Reserve, that’s all the more reason to read Peter’s book: I predict that within a few pages, lack of interest will morph into intrigue.

Peter argues that the presence of Reserve Bank presidents on the Federal Open Market Committee (FOMC) creates constitutional problems both with respect to their appointment and with respect to their removal. Before delving into the appointment and removal questions, a bit of background might be helpful. The president of each of the 12 Federal Reserve Banks is appointed to a five-year term by the bank’s Class B and Class C directors “with the approval of the Board of Governors of the Federal Reserve System.” 12 U.S.C. § 341 . Class B directors are chosen by the financial institutions that hold stock in the Reserve Bank; Class C directors are chosen by the Fed’s seven-member Board of Governors. The Fed’s seven governors are themselves appointed by the President with the advice and consent of the Senate, and the President may remove a governor “for cause.” 12 U.S.C. §§ 241, 242. Peter and I agree—as does virtually everyone else—that the provisions governing the appointment and removal of Fed governors are constitutionally unproblematic; our disagreement relates to the Reserve Bank presidents only. (And even the word “disagreement” might be a tad too strong. My modest claim is that the presence of Reserve Bank presidents on the FOMC is constitutionally defensible, but I admit that it would be easier to defend the FOMC’s structure if the Reserve Bank presidents weren’t there.)

Peter’s constitutional concern arises from the fact that five Reserve Bank presidents are members of the FOMC. The president of the Reserve Bank of New York is always one of the five; the four remaining seats rotate among the other Reserve Banks. The Fed governors are also FOMC members, so the FOMC is a 12-person committee when there are no vacancies. The FOMC gives orders to the Reserve Banks to carry out open market transactions—i.e., purchases and sales of securities (in practice, this primarily involves telling the trading desk at the Reserve Bank of New York when to buy and sell Treasury notes and bonds). Through these transactions, the FOMC influences the money supply and thus the prevailing interest rate.

Peter’s constitutional argument can be summarized as follows:

(1) The Reserve Bank presidents who sit on the FOMC are “Officers of the United States” for constitutional purposes;

(2a) The process for appointing Reserve Bank presidents does not conform to the requirements of Article II, § 2, clause 2 , which governs the appointment of “Officers of the United States”; and/or

(2b) The process for removing Reserve Bank presidents violates the separation of powers, as interpreted by Supreme Court decisions addressing the removal of “Officers.”

Let’s start with (1): Do the Reserve Bank presidents qualify as “Officers of the United States” for constitutional purposes? Peter assumes that the answer is yes (p. 108), but I am not so sure. The fact that the Reserve Banks are chartered by Congress does not mean that their presidents are “Officers of the United States”: Congress also has chartered the Society of American Florists and Ornamental Horticulturists , but few would argue that the Society’s president is an “Officer” in the constitutional sense of the term. The list of congressionally chartered organizations is long, ranging from the Agricultural Hall of the Fame to the Women’s Army Corps Veterans’ Association. Something more than a congressional charter is needed to make an organization’s leader an “Officer.”

The Supreme Court has said that an “Officer” is one who exercises “significant authority pursuant to the laws of the United States,” see Buckley v. Valeo , 424 U.S. 1, 126 (1976), but not any type of authority will do. The CEO of Girl Scouts of the USA exercises authority pursuant to 36 U.S.C. §§80301-80307; that does not make her an “Officer” under Article II. As the Buckley court explained, Congress “undoubtedly” may “create ‘offices’ in the generic sense and provide such method of appointment to those ‘offices’ as it chooses” if “the holders of those offices . . . perform duties . . . in an area sufficiently removed from the administration and enforcement of the public law as to permit their being performed by persons not ‘Officers of the United States.’” Id. at 138-39 (emphasis added). The role of the Girl Scouts’ CEO, while significant, is “sufficiently removed” from law enforcement and administration that she is an officer in the “generic sense” and not an “Officer” in the constitutional sense. So the fact that she was appointed by the Girl Scouts’ national board, rather than by the President with the advice and consent of the Senate, creates no constitutional difficulties. Nor do any difficulties arise from the fact that the President can’t fire the Girl Scouts’ CEO.

Are the open market transactions that the FOMC orders “sufficiently removed from the administration and enforcement of the public law as to permit their being performed”—or directed—“by persons not ‘Officers’” in the constitutional sense? These transactions move markets, but one can be a market mover without being an “Officer” under Article II (see, e.g., Warren Buffett ). The individuals whom the Supreme Court has deemed to be “Officers” generally wield adjudicatory, investigative, enforcement, or rulemaking functions. See, e.g., Buckley, 424 U.S. at 110-13; Free Enter. Fund v. Pub. Co. Accounting Oversight Bd. , 561 U.S. 477, 506 (2010). The FOMC’s functions—voting on whether to buy/sell securities and enter into swaps—strike me as quite different from the typical “Officer” tasks.

Bank Presidents as “Inferior Officers”?

Even if members of the FOMC are “Officers of the United States,” that does not necessarily mean that the membership of Reserve Bank presidents on the committee is unconstitutional. The Appointments Clause says that “Congress may by Law vest the Appointment of such inferior Officers as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” A multimember body such as the Federal Reserve Board of Governors can qualify as a “Head of Department.” See Free Enter. Fund, 561 U.S. at 512-13 (five-member Securities and Exchange Commission is “Head of Department”). And it is at least arguable that Congress has indeed vested the appointment of Reserve Bank presidents in the Board of Governors. Recall that the Reserve Bank presidents are chosen by the bank’s directors “with the approval of the Board of Governors.” As a practical matter, the governors can disapprove every nominee until the directors send them someone they like. The governors’ control over the identities of the Reserve Bank presidents may or may not be consistent with the Appointments Clause—the case law on the question is sparse. But whereas Peter says with confidence that “the Reserve Bank presidents are unconstitutionally appointed” (p. 113), I think that the question isn’t quite so open and shut.

With respect to removal, 12 U.S.C. § 248(f) allows the Board of Governors to fire any of the Reserve Bank presidents. Specifically, § 248(f) authorizes the Board of Governors:

To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Board of Governors of the Federal Reserve System to the removed officer or director and to said bank.

The president is an “officer” of the Reserve Bank; that is clear enough from 12 U.S.C. § 341 (“The president shall be the chief executive officer of the bank” (emphasis added)). So the only apparent restrictions on the governors removing a Reserve Bank president are (1) that the governors have to give a reason (apparently any reason will do) and (2) that they have to tell the president and the bank what the reason is. Perhaps one might argue that the use of the word “cause” in § 248(f) implicitly limits the range of reasons that the governors can cite, but I don’t think that’s the most natural reading of the text. And in any event, the canon of constitutional avoidance instructs courts that if a statute is susceptible to more than one reasonable interpretation, the court should choose the one that avoids raising constitutional problems. If the word “cause” implies some sort of limitation on the reasons for which the governors can remove a Reserve Bank president, then the statute might indeed raise constitutional problems. See Free Enter. Fund, 561 U.S. at 495-98. But if Reserve Bank presidents are inferior officers removable at will by the Board of Governors, and if the governors are removable for cause by the (U.S.) President, then this looks almost exactly like the arrangement that the Court inFree Enterprise ultimately allowed. See id. at 509.

To be sure, all of this assumes that Reserve Bank presidents are “inferior Officers.” If they are principal officers, then the Constitution requires them to be appointed by the (U.S.) President with the advice and consent of the Senate—a requirement clearly not satisfied here. On the principal/inferior officer distinction, the Supreme Court has said that “whether one is an ‘inferior’ officer depends on whether he has a superior.” Edmond v. United States, 520 U.S. 651, 662 (1997). Put differently, “‘inferior officers’ are officers whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate.” Id. at 663. And “[t]he power to remove officers . . . is a powerful tool for control.” Id. at 664.

Based on the Edmond test, one can argue quite reasonably that Reserve Bank presidents on the FOMC qualify as “inferior officers” who are supervised by the governors. Whatever authority the Reserve Bank presidents exercise by virtue of their voting membership on the FOMC, they can exercise it only in the presence of the governors. And as noted above, the governors can oust any Reserve Bank president at any time (provided, again that the governors give some reason). This is not, concededly, a typical principal/inferior arrangement, but it is not an obviously unconstitutional one either.

The Federal Reserve’s “First Founding”

One final point: The Supreme Court quite often looks to historical practice for guidance on appointment and removal issues. See, e.g., NLRB v. Noel Canning , 134 S. Ct. 2550, 2559 (2014) (“[L]ong settled and established practice is a consideration of great weight in a proper interpretation of constitutional provisions regulating the relationship between Congress and the President” (internal quotation marks omitted)); Free Enter. Fund, 561 U.S. at 505 (“Perhaps the most telling indication of the severe constitutional problem with the PCAOB is the lack of historical precedent for this entity” (internal quotation marks omitted)). And the historical precedent favoring the Fed here is longstanding. Peter writes of the “three foundings of the Federal Reserve” (p. 16)—the Reserve Act of 1913, the Banking Act of 1935, and the Fed-Treasury Accord of 1951—but there was an earlier “founding” as well. Not long after the nation’s Founding, the First Congress passed the Bank Bill of 1791 , which established the first Bank of the United States. It too had the power to sell (though not to buy) government securities, and it furthermore had the power to borrow, to lend, and to deal in bills of exchange and gold and silver bullion. Its president was chosen by the bank’s directors, who in turn were chosen by its stockholders, with no role for President Washington or the Senate. And while the bank’s constitutionality was hotly contested in the 1790s, opponents did not (to my knowledge) attack it on appointment or removal grounds.

The last fact seems to suggest that the members of the First Congress—many of whom were also among the Constitution’s Framers—did not understand the directors and officers of the bank to be “Officers of the United States” in the constitutional sense. The Congress that passed the Reserve Act of 1913 seems to have shared the same understanding. And in my view, it is an entirely reasonable understanding of the term “Officer” in Article II, though not the only reasonable one.

As Peter explains (pp. 117-19), federal judges have invoked various jurisdictional and equitable doctrines to dismiss lawsuits challenging the Reserve Bank presidents’ membership on the FOMC. So the constitutional question raised by the Reserve Bank presidents’ presence on the FOMC may never be resolved in court. But whether or not the issue is justiciable, the constitutional question most certainly matters to the Fed’s legitimacy. For that reason, defenders of the Fed cannot so easily wave off the charge that the FOMC’s current structure is unconstitutional, even if federal courts are unlikely to upset the status quo.

And yet while the Fed’s defenders cannot ignore the constitutional critique, they need not surrender to it either. The case for the FOMC’s constitutionality is not easy, but it is also not impossible. Peter’s book should spur lawyers and academics to think critically about the FOMC’s constitutional status. And whether or not we agree with Peter’s conclusion, his book will serve to define the terms of the debate.


Daniel Hemel is an assistant professor at the University of Chicago Law School.

 This post is part of an online symposium reviewing Peter Conti-Brown’s new book The Power and Independence of the Federal Reserve. You can read the entire series, as well as other posts on the Federal Reserve, here.

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