The recent Supreme Court ruling seems to have been a correct one overall. The decision confirmed that President Trump rightly exercised his authority in removing two previously appointed members from what was termed an “independent body.” However, the court’s approach appeared somewhat hesitant, particularly concerning the Federal Reserve.
The federal government operates across five branches. There are three branches established by the Constitution—legislative, judicial, and executive—along with the “fourth estate” being the free press, which, well, we certainly need. And then there’s the fifth branch, which encompasses the bureaucracy. A significant ruling made around 90 years ago in the Humphrey’s Executor case concluded that the Federal Trade Commission (FTC) was not part of the executive branch because it wielded “quasi-legal or quasi-judicial” powers. Thus, the court decided that the President couldn’t exclude FTC members.
This Humphrey’s ruling feels a bit misguided from the outset. Agencies can only exercise authority derived from laws. While these authorities might echo legislative or judicial powers, they ultimately hinge on statutory law. In essence, these regulatory bodies implement federal laws and remain part of the executive framework.
The Humphrey ruling has notably enhanced the independence of so-called “independent bodies,” leading to an expansion of their power and nudging us toward a more bureaucratic governance model.
It appears that the recent Supreme Court decision aimed to rectify earlier mistakes, perhaps concerning the Federal Reserve. In various opinions, central banks have been characterized as “uniquely structured semi-private entities.” Simply put, the courts suggest that the Fed is different and deserves distinct treatment.
As Judge Antonin Scalia might have pointed out, this notion doesn’t hold water. Perhaps the justices are confused, mistaking the Federal Reserve system for the Federal Reserve Commission. They might be trying to set the stage for giving central banks a protected status.
The Federal Reserve is indeed uniquely structured, featuring a board of directors, a Federal Open Market Committee that sets fees, and 12 regional banks run by independently elected presidents.
However, this structure isn’t so unique when considering the presidential nominations on the board, which include Senate-confirmed members, a Senate president, and two vice-presidents. There’s nothing particularly special about that setup.
The Supreme Court implies that the Fed operates as a “quasi-private entity,” noting that the 12 regional banks function independently of the Federal Reserve Commission and are self-funded, with some designated as “private.” Yet, this distinction doesn’t directly address whether the board acts as part of the executive branch, meaning the President is indeed capable of removing its members.
Furthermore, the court’s attempts to justify the Fed’s separation from the executive branch don’t hold water; members should indeed be removable by the President.
Yet, the underlying tension regarding central bank independence is complex and shouldn’t be lightly dismissed. This independence isn’t absolute, but it needs to be enough to keep monetary policy insulated from political pressures.
One potential reform to create a more balanced situation might be to ensure that the terms for the Fed Chairman and Vice-Chairman conclude when a new President takes office. Ideally, the new President shouldn’t have to deal with a Treasury Secretary appointed by their predecessor. The same principle should apply to central bank leadership. If the President has to keep inherited positions, it could weaken their standing right from the start.
