US Presidents
HHH and the HHH
Federal Reserve
By Peter C. Earle
In late August 2019, Bill Dudley, former
President of the Federal Reserve Bank
of New York and Vice Chairman of the
Federal Reserve Open Market Commit-
tee, wrote an unprecedented editorial in
Bloomberg Magazine. In it, he took to
task President Donald Trump’s badgering
of central bank officials via Twitter and
urged current Fed Chairman Jerome Pow-
ell not to “enable” the President’s policies.
A former Fed official taking the Chief
Executive to task is extraordinary, but the
circumstances under which it occurred
seems equally so. Since April 2019, Trump
has made no less than 37 tweets criticizing
the Fed’s implementation of monetary
policy and has made numerous other
comments via the media.
The New York Times has decried
Trump’s media attacks on the Fed as
“highly unusual.” USA Today has said that
in directing comments at the Fed regarding
their policies, Trump has “br[oken] long-
standing taboo[s].” And the Washington
Post laments that the 45th US President had
“violate[d] another Presidential norm.”
In fact, the current President’s com-
ments only qualify as unusual on account
of their directness and don’t (really) break
any long-standing codes of conduct.
Instead, they call attention to one of the
most sturdily-held shibboleths of Ameri-
can domestic policy: the independence of
the United States Federal Reserve Bank.
While it ostensibly “make[s] monetary
policy independently of short-term politi-
cal influence,” the Fed—by virtue of its
structure, mission creep and the nature of
its particular “policy lever”—is inevitably
thrust into the political sphere.
Going back to the 1920s, American Pres-
idents have both explicitly and implicitly
requested, cajoled and even threatened
the central bank’s officials. At times, Fed
officials have resisted those overtures, and
at other times they seem to have acceded
to those demands.
A Labyrinthine
Organizational Structure
The Fed’s very organizational structure—
initially designed and modified over time
to placate various public and private inter-
ests—subjects it to regular engagement
with political and private interests.
• Fed officials are appointed by the Exec-
utive Branch and confirmed by Con-
gress; many rise to prominence through
positions at the US Treasury or on the
Council of Economic Advisors;
• Private meetings between the Fed Chair-
man and Presidents are a long-standing
fixture of economic policy coordination
and implementation;
• The Fed Chairman and other Fed offi-
cials testify publicly before Congress
twice every year, which includes a
sometimes-contentious question-and-
answer session;
• Leadership at the 12 regional Federal
Reserve Banks are made up of appoin-
tees of the member banks which essen-
tially own them; not by the President
or Congress, but by regional bankers
and business executives. (Historically,
they tend to be more hawkish than the
seven governors of the Federal Reserve,
who are appointed by the President and
confirmed by the Senate);
• In times of war, disaster or under other
unusual circumstances, the Fed is
expected to work closely with the US
Treasury and other government agen-
cies to coordinate monetary, fiscal and
other policy initiatives.
18 FINANCIAL HISTORY | Fall 2019 | www.MoAF.org
Even with this mixed private-public
structure, the Federal Reserve was par-
tially immune to the full range of political
manipulation for its first six decades by
virtue of the gold standard: with the gold
price pegged amid the international sys-
tem of fixed exchange rates, Fed control
of the growth of the money supply was
bound. But with the end of the dollar’s
convertibility to gold in 1971, and thus the
end of exposure to market discipline, the
way was paved for the potential politiciza-
tion of the Federal Reserve.
A Century of Mission Creep
Upon its founding in 1913, the Federal
Reserve’s exclusive mandate was to pre-
vent financial panics and bank runs. This
was the case until 1946 when, inspired
by both the Great Depression experience
and millions of veterans returning to the
workforce from foreign battlefields, Con-
gress passed the Employment Act.
This added to the Fed’s mandate the
requirement that monetary policy be con-
ducted in a way that promotes “conditions
under which there will be afforded useful
employment opportunities…and to pro-
mote maximum employment, production
and purchasing power.”
The 1978 Full Employment and Balanced
Growth Act (“Humphrey-Hawkins”)
added “reasonable price stability” to the
Fed’s mandate, additionally requiring that
the Board of Governors conduct monetary
policy in a way that “maintains long-run
growth,” that they transmit a monetary
policy report to Congress twice a year
and that they conduct monetary policy in
conjunction with, and in support of, the
economic policy and goals of the Execu-
tive Branch. (It has been suggested that the
addition of financial stability to the Fed’s