Fed Gov says ending independence would be bad for policy

A pending lawsuit could upend the Federal Reserve Board’s political independence, and one central bank official said that while such an outcome would be bad for monetary policy, he would respect the court’s ruling — even if he didn’t agree with it.

“At the end of the day, if the Supreme Court makes that decision, that’s the decision we have to live with. That’s the way our government, our democracy, works,” said Fed Gov. Christopher Waller Thursday afternoon. “Do I think it necessarily leads to good policy outcomes? Probably not, but that’s all part of being accountable to an electorate and the Congress.”

Waller, who appeared on stage at an event hosted by the Wall Street Journal on Thursday afternoon, was asked to weigh in on the ramifications of Wilcox v. Trump, a case challenging the president’s ability to fire members of independent agencies.

Gwynne Wilcox, a former member of the National Labor Relations Board, is suing the administration on the grounds that President Donald Trump was acting outside his constitutional authority when he fired her in January. The case challenges a decades-old precedent — established by the 1935 decision in Humphrey’s Executor v. United States — that independent agency appointees can only be fired for cause. 

Because the Fed is an independent agency, it has long held that its board members cannot be fired at will. That assertion has long been questioned, but never tested. But the Trump administration has openly resisted the idea of agency independence, claiming that all parts of the government that are not Congress or the courts fall under the executive branch. 

But Waller argued that keeping politics out of monetary affairs is an idea dating back to the founding of the country. He noted that the framers of the Constitution gave authority over the money supply to Congress — which it later transferred to the central bank — for good reasons.

“The founders, they watched what happened during the Revolutionary War as states printed their own money — the governor was just printing money to finance the war, and they blew inflation out the door,” he said. “Even the Founding Fathers knew that this wasn’t necessarily a great idea to just give control of printing money to the executive branch. So, it’s kind of all in there. Congress has the authority, in Article 1, to print and regulate funding. There are things in there that clearly view money and monetary policy as different than practically everything else.”

Waller, who studied central bank independence as a Fed researcher and academic, said the Fed was designed to be an apolitical board of subject matter experts, reflecting an array of political beliefs that did not change from one administration to the next. 

“That was always the thing I had to deal with: You’re trading off volatility in policy against … accountability to the electorate,” he said. “That’s the subtle balance you’re trying to do with these institutional designs.”

Wilcox v. Trump was filed in the U.S. District Court for the District of Columbia last month. In a letter to Sen. Dick Durbin, D-Ill., acting Solicitor General Sarah Harris said the Justice Department now believes the protections granted to independent agency appointees by Humphrey’s Executor are unconstitutional. In her letter she noted the NLRB, the Federal Trade Commission and the Consumer Product Safety Commission as examples of independent agencies whose members should be fireable at will by the president. The Fed, thus far, has not been brought into the litigation. 

But it is believed that the administration would be willing to challenge the Fed’s independence. Fed Vice Chair for Supervision Michael Barr resigned from his position as the central bank’s top regulator at the end of last month based on the concern that Trump would seek his removal. 

When he announced his resignation in January, Barr said he believed the law would be on his side, but the legal battle would pose too much of a distraction to the institution.

While Waller supports the spirit of the Fed’s independence, he said it would be up to others to defend its legality.

“I’m not a lawyer and I’m certainly not a constitutional lawyer,” he said. “It’s clearly a case that’s before the Supreme Court now, and it’s a fundamental constitutional question of the power of the executive. And the Supreme Court could say ‘No, you cannot fire members of these independent boards,’ or they could say ‘Yes, you can.'”

Tariff likely to be passed on

Waller also discussed the Fed’s views on the inflationary impacts of new tariffs on Canada, Mexico and China. 

During the event, Waller said the Fed would likely attempt to “look through” price level increases that might result from the steep import taxes on America’s largest trade partners. He acknowledged that such an approach would mirror the Fed’s view of so-called “transitory” inflation during the COVID-19 pandemic, but he noted that officials will take the learnings from that previous experience into what lies ahead.

“We’re humans. I mean, humans are affected by what they went through in terms of thinking about their next move,” he said. “Even though … it does sound like we’re advocating for, you know, getting the band together on Team Transitory, it does have that flavor, but this is … one thing you have to kind of think about whether you do it or not.”

But Waller said if the tariffs hold, there will be no getting around price hikes for consumers. Unlike the limited and targeted tariffs implemented during the first Trump administration, he said the current policies would be too large for importers to simply absorb on their own without passing along some of the increases to customers.

“The bigger the tariff, the harder it is for firms and suppliers to eat it. It has to get passed on,” he said. “When they pass it on, it’ll be a bigger number.”