The Federal Reserve’s independence from the White House has long been enshrined in the law. But an executive order that President Trump signed this week seeking to extend his administration’s reach over independent agencies is prompting concerns about how much further he will go to challenge that separation.
Mr. Trump’s directive took aim at regulatory agencies that had typically operated with limited political interference as authorized by Congress.
The order partly shielded the Fed by exempting the central bank’s decisions on interest rates. Those are voted on at every meeting by seven presidentially appointed members of the Board of Governors, who typically serve 14-year terms, as well as a rotating set of five presidents from the regional reserve banks.
But the order sought to exert authority over how the Fed oversees Wall Street, decisions that are ratified with majority support by the board.
The order was the president’s latest attempt to centralize the executive branch’s power over the government. It requires independent organizations to submit proposed rule changes to the White House for review and gives the Office of Management and Budget oversight of how these institutions spend funds and set priorities. It also asserts that the president’s and the Justice Department’s interpretations of the law are binding and that alternative interpretations require authorization.
The expansive nature of the order has raised questions about whether Mr. Trump’s decree is legally applicable to an institution like the Fed. It has also fueled speculation that the president — who has a history of trying to influence the central bank’s decision on interest rates — may eventually turn his scrutiny to monetary policy decisions.
“The question here is just how long is it going to take us to slide down the slippery slope when, at some point, even this exception goes away,” said Graham Steele, a longtime financial regulation lawyer and former Treasury Department official, referring to the carve-out for monetary policy decisions. “If they accept the consequences of this executive order, the only thing that’s stopping Trump from going any further is his own impulse control.”
The Fed’s independence from the White House has historically been seen as crucial to the stability of the economy and the global financial system. Congress granted the central bank this status to ensure it could make policy decisions related to the economy and the banking system free from political interference. To further protect the institution from meddling, lawmakers also gave the Fed the authority to control its own budget and staff and erected safeguards to protect policymakers from being removed from their presidentially appointed positions arbitrarily.
Mr. Trump is not the first president to want more of a say in regulatory rule changes made by federal agencies. But directives from Presidents Ronald Reagan and George W. Bush, for example, were far less intrusive on independent agencies.
It is also not Mr. Trump’s first confrontation with the central bank over its independence. The president clashed with Jerome H. Powell, whom he appointed as the Fed’s chair during his first term, for resisting his demands to lower interest rates quickly enough.
In justifying the latest order, the administration on Tuesday criticized former administrations for allowing “so-called independent regulatory agencies to operate with minimal presidential supervision.” The order said that to improve accountability to the American people, “officials who wield vast executive power must be supervised and controlled by the people’s elected president.”
Christina Skinner, a University of Pennsylvania professor who is focused on bank regulatory issues and has become prominent in conservative policy circles, described Mr. Trump’s decision as a “really important and long overdue constitutional correction.”
“The agencies are part of the executive branch, and they exist to help the president implement and enforce the law as he sees fit,” she said.
But to some other legal scholars, the order represents an alarming overreach not only on the Fed but also on Congress. They say it risks running afoul of the many protections in place that safeguard the central bank.
“I think Congress should be upset about this executive order as much as the independent agencies,” said Scott Alvarez, a former general counsel at the Fed board. He called some of the measures “an assault on the legislative branch.”
Like previous Fed chairs, Mr. Powell, who was reappointed for another term in 2021, has staunchly defended the institution’s independence. He reiterated that at The New York Times’s DealBook Summit in December, saying it was the “law of the land” and had wide-ranging support from both Republicans and Democrats on Capitol Hill.
That independence has influenced the Fed’s strategy for dealing with executive orders both from Mr. Trump and from past presidents. Asked about the central bank’s compliance at a news conference in January, Mr. Powell said, “As has been our practice over many administrations, we are working to align our policies with the executive orders as appropriate and consistent with applicable law.”
The Fed declined to comment beyond pointing to Mr. Powell’s January statement.
“Executive orders cannot override the law,” Mr. Steele, the financial regulation lawyer, said.
By drawing a distinction between the monetary policy activities of the Fed and those related to its supervision and regulation of the country’s banking system, Mr. Trump’s order tacitly acknowledges the unique standing of the central bank compared with the other agencies now caught in the cross hairs. But the idea that the central bank could actually retain independence if only a portion of its responsibilities are given that treatment is problematic, regulatory experts said.
“It is very hard to constitute a body that’s truly independent and then be asked not to exercise independent judgment with respect to matters that are fundamental to the roles that they are being asked to play,” said Kathryn Judge, a financial regulation expert at Columbia Law School.
The situation gets even more complicated when considering the other activities the Fed undertakes, especially during times of crisis, that do not neatly fall into either the monetary or the regulatory bucket, Ms. Judge said. For example, during the Covid-induced economic shock in 2020, the central bank aggressively intervened in a range of debt markets in order to shore up the financial system, working closely with the Treasury Department.
“The lines around what constitutes monetary policy have never been cleanly drawn,” she said.
Jeremy Kress, a former Fed banking regulator who is now a faculty director of the University of Michigan’s Center on Finance, Law and Policy, also noted that the order did not point to any concrete rationale as to why the Fed’s monetary independence was protected and its functions related to supervision and regulation were not, suggesting Mr. Trump could easily change the remit of the directive.
“They simply say one is in scope and one is out of scope with no legal reasoning, and I think that should make Jay Powell very nervous,” Mr. Kress said. “If Powell takes steps that Donald Trump doesn’t like, the next executive order could be on monetary policy.”
Even without that more extreme step, Mr. Alvarez, the former general counsel, warned that the directive, as written, could lead to an erosion of the Fed’s monetary policy independence indirectly. For one, the latitude bestowed to Russell T. Vought, director of the Office of Management and Budget, to review and adjust independent agencies’ budgets could come to bite if, for instance, the president disapproved of certain spending related to economists or other staff members.
“He’s not telling them how to implement monetary policy, but he’s greatly affecting it by reducing the inputs, research and information they have to make monetary policy decisions,” Mr. Alvarez said.
“The way it’s written, if you wanted to do mischief, you could,” he added.
