MNI INTERVIEW: Fed Regional Banks Key To Independence - Judge

The Federal Reserve's distinct regional design that counterbalances its Washington board is vital to the institution’s accountability and the central bank will need to lean in to its regional structure to help preserve its independence, Kathryn Judge, Columbia Law School professor, told MNI. 

"The 12 regional banks have long been one of the key mechanisms to which Congress sought to protect the Fed from excessive presidential influence," said Judge in an interview.

"The 12 Fed Banks were pivotal in Fed’s path to striking balance between independence and accountability and they could be key going forward," she said. Judge is working on a book that looks at the Banking Act of 1935 that reformed the Federal Reserve System. 

It will likely take years to establish a new equilibrium and even if the Supreme Court creates a “Fed exception” when it does away with other independent agencies, it is far from clear that Fed independence will be sustainable as a legal or normative matter, said Judge, who previously clerked for Richard Posner on the Seventh Circuit Court of Appeals and Justice Stephen Breyer on the U.S. Supreme Court. 

"Over the history of the Fed, independence will likely continue to evolve. There's no fixed vision of Fed independence," she said in an interview. 

ADMINISTRATIVE STATE

President Donald Trump’s moves to dismantle administrative agencies represent an unprecedented assertion of presidential power over both Congress and the administrative apparatus, which creates a new environment for the Fed, she said. (See: MNI POLICY: Regional Fed Banks Could Face Revamp Under Warsh)  

"It is true we are going through a period of evolution and disruption with respect to the structure of the administrative state, and this is why it's such an important time to understand the differences across administrative agencies, the different types of structures that Congress put in place to protect independence, and the very different rationales for independence across different domains," said Judge.

"We shouldn't take too much comfort if the Fed gets through the next couple of years," she said about the central bank's independence. She suggested a Fed argument justifying itself on the grounds of expertise may not be as successful with the Supreme Court going forward. 

"The Fed's regional design does make it different, it does make it more accountable, and I think leaning into that is going to be key for it trying to justify both constitutionally but more importantly in terms of democratic legitimacy why it should retain some meaningful independence over monetary policy."

The Federal Reserve is a unique, hybrid entity within the U.S. administrative state, possessing operational independence over monetary policy. It is largely shielded from presidential removal powers and congressional budget appropriations. However, its regulatory functions are increasingly subject to standard executive oversight.

"My fear is that even if the Fed manages to maintain some semblance of independence over the next few years, even if the Supreme Court creates a special carveout, the overall disruption and change with respect to the structure of the federal government that is underway at this moment is likely to dramatically weaken the ground upon which Fed independence has stood," Judge said. 

"Fed independence is likely to remain fragile and potentially in peril if it is not further strengthened in the years ahead as a result of these developments." (See: MNI INTERVIEW: Fed Winning Fight Over Independence-Richardson) 

TRUMP V. COOK

The Supreme Court is currently weighing a landmark case, Trump v. Cook, regarding President Trump's unprecedented attempt to fire Federal Reserve Board of Governors member Lisa Cook over allegations of mortgage fraud. 

The Supreme Court heard oral arguments in January, with a final ruling pending. During hearings, the Justices appeared highly skeptical of the President's authority to summarily fire a sitting Fed governor without affording her due process or a chance to contest the claims.

"There's a reasonable chance that the case will not be fully resolved when the Supreme Court hands down its decision. There's a number of different bases upon which the court could resolve the issue that would address the stay but not fully resolve the question of whether she can remain in her job permanently," Judge said.