The Federal Reserve’s role is complex, especially during crises when it intervenes in markets, as seen during the 2020 Covid crisis. Ms. Judge highlighted blurred lines around monetary policy, while Jeremy Kress critiqued an executive order lacking legal rationale for limiting the Fed’s independence in regulation versus monetary policy. This could allow alterations to the Fed’s scope by future administrations. Furthermore, former general counsel Mr. Alvarez warned that the order could indirectly undermine the Fed’s autonomy by empowering the Office of Management and Budget to affect funding and resources necessary for effective monetary policy decisions.
The situation becomes increasingly complex when we take into account the additional actions the Fed engages in, particularly during crises, which do not categorically fit into either the monetary or regulatory categories, stated Ms. Judge. For instance, during the economic turmoil caused by Covid in 2020, the central bank took assertive measures in various debt markets to stabilize the financial system, collaborating closely with the Treasury Department.
“The definitions of what qualifies as monetary policy have never been clearly established,” she remarked.
Jeremy Kress, a former Fed banking regulator currently serving as the faculty director of the University of Michigan’s Center on Finance, Law and Policy, emphasized that the order failed to provide a solid justification for why the Fed’s monetary independence was safeguarded while its supervision and regulation functions were not, implying that Mr. Trump could readily alter the scope of the directive.
“They merely indicate one falls within scope and the other does not without any legal rationale, which I believe should cause concern for Jay Powell,” Mr. Kress expressed. “If Powell makes decisions that Donald Trump disapproves of, the next executive order could directly target monetary policy.”
Even without such a drastic measure, Mr. Alvarez, the former general counsel, cautioned that the directive, as it stands, might lead to a gradual decline in the Fed’s independence in monetary policy. The authority granted to Russell T. Vought, director of the Office of Management and Budget, to review and modify the budgets of independent agencies could backfire, particularly if the president disapproved of specific expenditures related to economists or other personnel.
“He may not be directing them on how to conduct monetary policy, but his actions significantly influence it by limiting the resources, research, and information necessary for making monetary policy choices,” Mr. Alvarez remarked.
“The way it’s framed makes it possible to create trouble if one wanted to,” he concluded.