JD FOSTER: The Fed Sits Under Whose Tent?

Just how independent is the Federal Reserve? Former Texas Sen. Phil Gramm and former Texas Rep. Jeb Hensarling recently commented on the Federal Reserve’s independence with respect to conducting monetary policy. On first reading they make a compelling case that the Fed is independent of the executive branch but not the legislative branch with respect to monetary policy. Upon further review their argument falls short.

Gramm and Hensarling note that the Constitution’s Article I gives Congress the power to coin money and regulate its value. They observe that in creating the Federal Reserve the Congress delegated that power. Thus in “carrying out narrowly defined monetary policy, the Fed isn’t subject to executive authority.”

By implication, though they don’t say so, the authors argue the Fed is not independent of the legislative branch with respect to monetary policy, which is mostly true but also somewhat worrisome. It is worrisome in part because Congress lacks any definite means of influencing monetary policy except through legislation.

The argument regarding the Fed and the executive branch starts to unravel in that the relevant statutes explicitly create a role for the president in nominating the Chair and the other six members of the Board. That sure looks like the Fed is part of the executive branch. If the president, subject to Senate confirmation, picks who runs an outfit that is part of the U.S. Government, then that outfit would seem part of the executive branch.

Moreover, all other Federal agencies created by Congress reflect a delegation of some power created by the Constitution. For example, the EPA was created by an act of Congress in 1970 yet is part of the executive branch. The Fed is no different.

To strengthen their case, Gramm and Hensarling distinguish monetary policy from the Fed’s regulatory activities which obviously express executive branch functions. However, the Fed’s regulatory activities reflect authorities granted by Congress, authorities it has through the Constitution.