Treasury Secretary Condemns Article as Fake News

Treasury Secretary Scott Bessent strongly criticized a recent article in the Financial Times, labeling it “tabloid trash.” He accused the publication of fabricating claims that suggested he had endorsed the Bank of England’s governance as a model for enhancing oversight of the Federal Reserve.

According to the Financial Times, Bessent had mentioned the possibility of integrating aspects of the UK’s Treasury and central bank relationship into the U.S. system. This included a formal communication system between the central bank governor and the finance minister, potentially serving as a framework for adjusting the relationship between the Federal Reserve and the U.S. government. This information came from an unnamed “financial industry executive familiar with the matter.”

Bessent took to social media to reject the article vehemently, asserting it was “obviously false” and “100% fake news.” He claimed he had previously denied the story to the Financial Times reporters, who he accused of relying on anonymous sources for their narrative.

In his comments provided to the newspaper, Bessent expressed admiration for the Bank of England’s tactics during financial crises but clarified that he found its letter-writing protocol “inefficient and bureaucratic.” This statement, however, was placed further down the article, away from the more prominent headlines.

The core assertions of the article hinted that Bessent had voiced approval for UK reforms from 1997 and considered altering the relationships between the Treasury and the Bundesbank modeled after the BoE’s practices. Yet, these claims were attributed solely to anonymous sources from the financial sector and a few market individuals who had interacted with Bessent.

Distinct Systems: BOE vs. Fed

It’s essential to recognize the significant institutional differences between the Bank of England and the Federal Reserve to grasp the Financial Times’ argument fully.

In the UK, the Bank of England Act of 1998 empowered the Chancellor of the Exchequer to set the central bank’s inflation target, currently at 2%. Despite the Bank’s operational independence, it remains “goal-dependent,” meaning the government governs the objectives.

If inflation veers off the target by over one percentage point, the governor must send a public letter to the Chancellor, outlining the reasons and response strategies. The UK Prime Minister will subsequently reply to these letters, which have been issued quarterly amidst rising inflation. Additionally, the BoE runs a quantitative easing program with formal compensation from the Treasury, positioning the government as a key player in managing the central bank’s balance sheet.

In contrast, the Federal Reserve functions under a very different design. While Congress has set broad mandates for maximum employment and stable prices, the Fed independently set its own 2% inflation target in 2012. It operates independently in terms of its goals and means.

The Fed does not utilize a letter-writing system to communicate with the Treasury; instead, it reports to Congress through semiannual monetary policy reports and the Fed Chair’s testimony. Regular meetings between the Treasury Secretary and Fed Chair occur privately, with the 1951 Treasury-Fed Agreement dictating the underlying relationship, aiming to eliminate any subordination of the Fed to Treasury borrowing needs established during World War II.

Moreover, unlike the BoE, the Fed is financed through its security portfolio profits and creates money without Treasury compensation.

Bessent’s Views on Reform

Bessent referenced a lengthy essay published in the journal International Economy earlier this year as a comprehensive outline of his views on Federal Reserve reform. In this 6,000-word piece, titled “The Fed’s new ‘capability’ monetary policy,” he argued that the Fed’s implementation of quantitative easing had harmful distributional impacts, eroding its credibility and independence.

The essay advocated for a reduction in nontraditional financial tools, limiting the Fed’s power, and initiating a genuine, unbiased review of the Fed’s practices. It suggested transferring everyday banking oversight back to the FDIC and the Office of the Comptroller of the Currency.

Interestingly, the Bank of England was only mentioned through a quote from former Governor Mervyn King, who critiqued the Fed for its dependence on inflation expectations as policy foundation. There was no examination of the BoE’s governance structure or correspondences with the Prime Minister.

“Over the last decade, I’ve authored more than 20,000 words on Fed decisions, policies, and modifications,” Bessent stated in his response. “I’ve never suggested this absurd idea before.”

The Warsh Perspective

The Financial Times piece also brought up Kevin Warsh, nominated by President Trump to succeed Jay Powell as Fed Chair when Powell’s term ends in May. The article referenced Warsh’s testimony before the House of Lords Economics Committee, where he reportedly showed interest in adapting the BoE’s letter-writing procedures for crisis situations.

Warsh, who possesses extensive knowledge of central banking, previously reviewed the BoE’s Monetary Policy Committee’s transparency practices in 2014 at the request of Governor Mark Carney. His review centered on meeting procedures and the promptness of minutes release, rather than accountability mechanisms for leadership.

During his 2023 testimony, Warsh endorsed the BoE’s autonomy as “essential” and emphasized that this independence necessitates neutrality in decision-making without favoring any side. The article stated that Warsh believed in employing BoE-like letters during crises to address and enhance the changes he and Bessent have publicly advocated for in the Treasury-Fed dynamic, based on insights from “those close to him.” Warsh, however, did not comment on this claim.

This discussion arose amidst increasing discord between the Trump administration and the Federal Reserve. The President has publicly criticized Powell, labeling him an “idiot” for not lowering interest rates, and the Justice Department has initiated an investigation against Powell related to the renovation of the Fed’s headquarters.

Bessent argued that the Financial Times constructed this article to propagate a “malicious false narrative of dysfunction and division,” stating that the paper had caused “irreparable embarrassment” to its parent company, Nihon Keizai Shimbun.