Saving the Federal Reserve from the unitary executive
You can have it both ways, if the Supreme Court wants to!
The “unitary executive theory” is one of the most misrepresented legal theories in America. It does not state that the President has the power to do whatever she wants to do, although Vice is a very entertaining movie regardless:
Rather, the theory states that the President has complete control over the executive branch. So Congress cannot create executive agencies outside presidential control or limit the President’s ability to remove executive branch officials.
The rationale behind that interpretation lies in the first line of Article 2 of the Constitution: “The executive power shall be vested in a President of the United States of America.”
There is also an ideological defense of the idea that is neither liberal nor conservative in the current American sense. The President is directly elected; the officials and panels appointed to head independent agencies are not. So a unitary executive increases democratic accountability.
That seems pretty clear?
The unitary executive in American history
Well, no. There is little evidence that the Constitutional Convention intended to make the President the sole authority in the executive branch. For example, here are the first two lines of Federalist #77, by Alexander Hamilton:
IT HAS been mentioned as one of the advantages to be expected from the co-operation of the Senate, in the business of appointments, that it would contribute to the stability of the administration. The consent of that body would be necessary to displace as well as to appoint. [Italics mine.]1
In this view, the first line of Article 2 is just saying the obvious: the President has executive power, but Congress can obviously limit it or assign new ones to new agencies. You can certainly read the text of the Constitution that way. Article 1 starts by saying, “All legislative powers herein granted shall be vested in a Congress of the United States.” Article 2, conversely, does not start by saying “All the executive power herein granted shall be vested in a President of the United States.”
Why, runs this line of reasoning, would the Founding Fathers have put an “all” and “herein granted” in Article 1 and left it out of Article 2 if they didn’t think it had meaning?2 Article 1 unambiguously hands every single legislative power to Congress and only Congress. Article 2 just says that the President has executive authority, with nothing there about its scope.
And as with unitary executive theory, there is a good nonpartisan ideological defense of independent agencies. The U.S. is all about limited government. What’s more limiting than a limit on the power of the President? Independent agencies limit the authority of an overweening executive that could otherwise use the powerful federation to profit friends and punish foes.
But there is indirect evidence pointing the other way. James Madison (after the Constitutional Convention) argued that he thought the document implied that the president could fire cabinet members. Congress agreed in the Decision of 1789, when it created the Department of Foreign Affairs with a Madison-inspired proviso that outlined what would happen after a Secretary “shall be removed from office by the President of the United States,” but it did not bother to give the President that explicit power.3 Rather, the law just assumed that he had it. And that Congressional decision gave us the view that the Decision of 1789 implied that there was a consensus that Article 2 gave the President control over executive officials, making him the decider.
Thus far, the U.S. has played it both ways. The President has been given the power to fire officials except when Congress says otherwise.4 In general, then, we have assumed that our executive isn’t unitary — a win for the Alexander Hamilton who wrote Federalist #77.
Until recently.
The Lisa Cook case
The current Supreme Court leans pretty strongly towards the unitary executive. All six conservative justices have signed onto decisions that uphold it in one way or another.
President Trump’s attempt to fire Fed Governor Lisa Cook will likely drag the structure of the Federal Reserve into this debate. 12 U.S.C. § 242 gives Fed governors 14-year terms and says they can be removed only for cause. Governor Cook is accused of listing two homes as her primary residence on two mortgage applications.
President Trump says that the allegation (backed by some evidence) is egregious enough to count as cause. But Governor Cook has indicated that she will not step down. Her case, then, will have two parts to it. Is her offense grave enough to activate the “for cause” clause? If not, is effective prohibition on removing Fed governors consistent with Article 2 of the Constitution?
If SCOTUS accepts an appeal it could decide “yes” to the first question. I am very hesitant to opine on that, although to be frank, the alleged offense is crazily minor. I searched and found at least two cases: one in 1981 and one in 2004 where federal agencies fired civil servants for mortgage fraud. The employee in 1981 had lied about her income and job title and the one in 2004 gave a friend nonpublic information about a HUD-owned property in Philadelphia.5
But those were civil servants. And both infractions were much more serious than the allegations against Governor Cook. If I had to bet, SCOTUS will rule on the constitutional issue.6
And it may want to, anyway!
The declaration of Federal Reserve independence
As many observers have pointed out, a ruling that President Trump could fire Fed governors at-will could cause serious problems.7 Politicians have an interest in re-election. Sometimes keeping interest rates low will serve that second interest at the expense of the first. Which means that monetary policy might not prioritize low inflation or financial stability. Hand the central bank over to elected officials and they will set interest rates too low in election years. Eventually, goes the logic, inflation will spiral upwards until voters get angry enough to punish governments.
But the logic here is the opposite of ironclad. Why should decisions made by politicians be worse than decisions made by technocrats? After all, politicians have an interest in financial stability! When there’s inflation, the voters toss them out. That’s a pretty big incentive to avoid playing games with interest rates. I stand unconvinced by the correlation between lower inflation and the spread of independent central banks since the 1970s. What elected government wants to risk the fate of Jimmy Carter or James Callaghan or, heck, Kamala Harris?
Well, since you ask …
President Trump has made it clear that he wants lower interest rates, regardless of what that might do to the economy. Whatever you might think about the proposition that central bank independence in general is a great and wonderful thing that has brought us puppies and rainbows, there is a case to be made that right now it would be a bad thing for America to abandon.8
Central bank independence is not a new idea: Congress began insulating the Federal Reserve from presidential politics as early as 1935. But those restrictions depend on the executive of the United States not being unitary! Either the Court will have to back off the unitary executive theory or it will have to put the American central bank under democratic Presidential control.
But maybe there is a way for the six unitarian judges on SCOTUS to have their unitary executive and eat it too, at least as far as the central bank is concerned. It would even have precedent. It would involve an unprecedented stripping the Fed of some of its Congressionally-delegated powers—while SCOTUS has stripped the office of the President of powers, it hasn’t before ripped away part of an agency’s authority.
Still, maybe the idea has legs. So let me make it public. But first, let’s ask …
Is the Federal Reserve an executive agency?
Congress can create Article I agencies to carry out its constitutional power as long as they are not executive agencies: thus we have the Congressional Budget Office and the Government Accountability Office, but also Article I courts, like the U.S. Tax Court and the U.S. Court of Federal Claims. But separation of powers must be maintained. In the words of a 1995 U.S. Court of Appeals decision: “The Supreme Court has indicated that delegations of rulemaking authority to Article I agencies may implicate separation of powers concerns.”
So let’s look at the Federal Reserve system. It consists of three elements:
The twelve regional Federal Reserve Banks;
The Federal Open Market Committee;
The Board of Governors.
The Federal Reserve Banks are chartered by Congress, but they are not executive agencies. They are owned by their member banks. They cannot force anybody to do anything. No fines, no guns. They have privileges that regular banks do not, but Congress is constitutionally allowed to establish monopolies if it wants to.
So their legal status is kosher even under the unitary executive theory.
The Federal Open Market Committee (FOMC) sets interest rates. That’s not an executive function, since the FOMC does this by buying and selling bonds in the market or by altering the interest rate it pays on the deposit accounts that banks hold at the Federal Reserve. Anyone can still make a loan at any interest rate that they want to charge, no one is at risk of having someone with a badge point a gun at them. So it’s also not an executive agency.
So far so good! We have no problems. SCOTUS can stop President Trump from firing Lisa Cook while still upholding — or at least not jeopardizing — the principle that he is the unconstrained head of the executive branch. That could get a seven vote SCOTUS majority, maybe more. It would not, however, be a borough majority.
The Board of Governors is a unitary problem
Which brings us to the Board of Governors. If it carries out executive functions then we have a problem, not least because its seven members make up a majority of the FOMC. (The other five consisting of the president of the New York Fed and a rotating group of four of the heads of the regional Federal Reserve Banks.)
So under unitary executive theory, if the Board is an executive agency, then the President can fire at will a member of the Board of Governors, which also means the President can also fire at will seven of the twelve members of the FOMC. Poof, no more independent Fed!
So what does the Board do? Well it can:
Set reserve requirements and discount rates.9
Regulate national banks chartered under federal law.10 State-chartered banks may choose to become members.
Set rules for financial institutions that maintain accounts at a Federal Reserve Bank or use Fedwire, the Fed’s payment system.
Regulate banks owned by a holding company.11
Regulate other creditors and depository institutions under various Congressional acts, including “systemically important financial institutions” (SIFIs) that are so big that their collapse could bring down the national economy under the Wall Street Reform Act of 2010.12
Having your central bank and eating it too: justifying Fed independence under a unitary executive
Which of these are problems under the unitary executive theory?
(1) Setting reserve requirements and discount rates:
These are core functions related to the issuance of money, which Article 1 gives to Congress. These are not executive functions, unless the Supreme Court wants to overturn McCulloch v. Maryland. Justice Kavanaugh, in particular, has already averred that he will accept this argument.
(2) Regulating national banks chartered under federal law:
National charters are a federal franchise under Article 1. Congress attached mandatory Federal Reserve membership to federal banking charters. But banking is not like flying, where you just cannot send something into the sky without FAA approval. Rather, banks can operate under state charters and simply not join the Federal Reserve System.13 Not only can state banks engage in the same kind of financial operations as national banks, but since the Interstate Banking Act of 1994 (aka “Riegle-Neal”) there have been no federal restrictions on their ability to branch across state lines.
Since banks voluntarily choose to subject themselves to regulation by the Board of Governors, then the Board is not an executive agency. After all, if you could choose to operate an airplane under state law instead of federal law — and fly that airplane over the state line as long as the other states approved — then it would be hard to argue that the FAA had executive authority over you.14
But we will return to this point about voluntary association, because it’s more complicated.
(3) Setting rules for institutions that use Fed services
This is a trickier, since it is pretty hard to be a bank and avoid the Federal Reserve’s payments system entirely. But it can be done! For example, there is the Clearing House Interbank Payments System (CHIPS) and it is pretty widely used by large banks instead of Fedwire. Smaller state banks could in theory band together and set up a CHIPS for the little guy, although this would be costly. A skeptical SCOTUS justice could reasonably decide that this meant that Board of Governors’ regulation was basically inescapable and therefore the Fed is an executive agency.
But SCOTUS could also decide that it wasn’t the Fed’s fault that no private agency had replicated its functions. The fact that a private agency could legally do so — or that a bank could, I dunno, use Bitcoin or schlep bills across the country or something — means that banks voluntarily subject themselves to Fed oversight and that does not make the Board of Governors into an executive agency.
The Fed itself says “operating circulars are contracts between a Reserve Bank and a financial institution that govern the provision of Reserve Bank services. Consistent with longstanding practice for all other operating circulars issued by the Reserve Banks, the Board does not believe those contractual documents need to be issued for public comment.” In 1983, the courts ratified this interpretation. Later courts cited Continental Illinois National Bank & Trust Co. v. Sterling National Bank & Trust Company as concluding “that operating circulars do not create any substantive rights.”
But remember that I told you we would return to the point about voluntary association? We’re there.
(4 & 5) The rub, there’s always a rub
And here we have the problem! The Federal Reserve does issue “system-wide” regulations that apply to all financial institutions, not just banks affiliated with the system. A comprehensive list (in legalese, I’m sorry) is here. Here’re the four biggies:
Regulation B: operationalizes the requirements of the Equal Credit Opportunity Act of 1974. It applies to all creditors. I guess I should have filed more paperwork when I lent my sister that money back in the day? Anyway, this is pretty clearly an exercise of executive authority.
Regulation D: under the Federal Reserve Act and the International Banking Act of 1978, this puts reserve requirements on any deposit-taking financial institution that does business with the public. Now, I guess you could say that since deposit-taking by definition creates money, then it could be an Article 1 function. It is a reach, but I can imagine Kavanaugh making the stretch and Roberts and the three liberals writing concurrent decisions.
Regulation E: governs electronic fund transfers. But all transfers, not just ones using the Fed’s infrastructure: “Any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account.” Yeah, that looks pretty executive.
Regulation J: in 1987, Congress handed the Fed the authority to govern check clearing for all depository institutions. The Check Clearing Act of 2004 expanded this authority. Now, the regulation is enforced via operating circulars and applies mostly to transactions that go through the Federal Reserve Banks at some point, so maybe it could be called an Article 1 function?
So the first and third of these are clearly executive functions and the other two require some creative interpretation to be kosher. Now add Fed regulation of bank holding companies and “systemically important financial institutions,” i.e., any big financial institution.
Yeah, the Board of Governors looks like an executive agency. I guess you either have to admit that the unitary executive theory is horseshit or hand keys to the Federal Reserve over to President Trump.
But maybe not!
Severance, without the chip in the head
The Court could save the Fed by declaring it sui generis, but that would be too tidy, like calling Staten Island part of “the city.” The Court used to lack only a justice from Staten Island. But we no longer have representation for Brooklyn and Queens.
There are problems with just declaring that the Fed is a special federal snowflake. It would invite future Congresses to create more “Article 1” agencies disguised as voluntary associations while they actually exercise executive power. It also makes the unitary executive look like a made-up doctrine, the Calvinball of constitutional theory. Both consequences kind of bely the purpose if you believe in unitary executive theory.
A cleaner option is to follow the spirit of Panama Refining Co. v. Ryan, decided in 1935. The National Industrial Recovery Act of 1933 (NIRA) handed President Roosevelt the power to prohibit the interstate transportation of oil produced in violation of state quotas. Congress can set such limits, the Court noted, but also stated that “nowhere in the statute has Congress declared or indicated any policy or standard to guide or limit the President when acting under such delegation.” Giving total discretion to the President violated the separation of powers. So it severed that grant of power from the Presidency but left the rest of NIRA intact.
SCOTUS could solve its Fed dilemma similarly. The Fed’s monetary and franchise powers are fine under Article 1 but its consumer credit and electronic transfer rules are not. The Court could strike those delegations and leave the Fed with its monetary core, forcing Congress to reassign the rest. (Or maybe Congress just leaves the banking system unregulated. I don’t know. It’s 2025, we might annex Panama or build Skynet or let federal agents run around in masks without badges. Who knows?)
The immediate objection is that this would be unprecedented. The Roberts Court has severed structures while leaving agency powers intact, as in 2010, when Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB) removed the PCAOB’s complex governing structure but left its authority unchanged. It did it again in Seila Law LLC v. CFPB.15 But it has never stripped substantive regulatory powers while leaving an agency’s governance structure intact. Critics would argue that only Congress can decide where those powers go.
The deeper objection would be that the unitary executive theory itself is wrong. When George Mason warned at the Convention that Article 2 grants the executive too much power — “We are not forming a Government by which the few are to govern the many,” he thundered — nobody countered by claiming, “Well, no, we just want to make sure that Congress will place no limits on the President’s control over executive officers!” After all, both in 2025 and in 1787, American states divide up executive authority, as do most other presidential republics.16
But the evidence is that this Court believes in the unitary executive theory. And it’s not crazy, just something with which I happen to disagree. Pretending that Court will change its mind when the arguments are not clear cut is not a useful exercise.
I do have to give one warning, however. The regulation is a powerful thing. There are legal remedies against capricious and unfair regulation, but they are often slow and expensive. The Trump administration has shown that it is willing to use its power against institutions that it does not like, so politicizing bank regulation could have its own deleterious consequences. But if you believe in unitary executive theory, as a SCOTUS majority seems to believe, then that is the potential price you will pay.
Here’s to eating that unitary, unsliced, delicious cake
The Roberts Court has shown an appetite for severance. If it wants to preserve the Fed while keeping faith with unitary executive theory, a Panama Refining solution presents a path. I personally think that a unitary executive is a terrible idea, regardless of the legal merits. But if you’re going to have a unitary executive, better it keeps monetary policy outside direct presidential control.
Of course, Congress will need to put the banking authority somewhere, which would open up the chance to completely rewrite banking law, which would probably result in a mess. But that’s the way our system works. Filibusters, the Senate, dysfunctional parties, paralyzed lawmaking, only two boroughs instead of four represented on the Supreme Court.
But given a unitary executive, you only have three options. The first is a political Federal Reserve under presidential control. The second is a specious carve out for the Fed that further delegitimizes the Supreme Court and makes unitary executive theory seem confused and ad hoc. (Although how legitimate can the Court be, if it has never once seated a justice from Staten Island?) The third is the above interpretation, that keeps the monetary policy part of the Fed’s mission outside politics, at least directly.
Unless, of course, a real expert tells me where I’m completely off base in comments!
What could go wrong?
Oh boy. Well, monetary policy would remain outside the President’s purview. But financial regulation would not. Financial institutions under Fed supervision controlled $32.4 trillion in assets. That’s a lot of cash. An unscrupulous government could, well, do a lot with that authority. In the words of my old friend Ross Levine from Flatbush:
Let’s say you want certain constituencies to have access to low-cost credit. You could easily make that happen. In fact, financial institutions themselves would be guessing that's what you want. You may not even have to be explicit. Let’s say I'm the president and you’re the head of JP Morgan. You know what my interests are. You know I have the power to influence your wellbeing.
I could probably get the supervisors to fire you, so I wouldn’t even have to say anything to you. You would simply act in a way that you think would please me. Let’s say there are people that are my enemies, and let's say I wanted to exact retribution. This could all be done in reverse. Maybe they don’t get credit. Maybe their businesses fail.
Let’s say there are certain stock prices that I think I would rather have go up or that I would rather have go down. There are a whole set of financial institutions making those decisions that could make that happen. The implications are simply not being appreciated by the public and I don’t think by politicians. So all of this stuff about tariffs and all of this stuff about the Fed to me is way less important.
Now, I’m not that pessimistic. Financial institutions have access to a lot of lawyers, and so far the legal system has kept the Administration’s worst instinct in check. But it means that the legal solution proposed here won’t by itself replace the ability of independent agencies to prevent the potential for political pressure.
A republic, if you can keep it, said Benjamin Franklin. But institutional decay, not democratic collapse, is the more serious worry. Although with the Court down from representing four boroughs to only two, we’ve already slid quite a way.
By 1793, Hamilton would be arguing the opposite, using language that sounds a lot like unitary executive theory. What, a man can’t change his opinion? C’mon, yuz. Even though I gotta tell ya, I think he had right the first time.
I think that anybody who has ever written anything already knows the answer to that one. It’s a great thing that the American constitution is parsimonius compared to the rhetoric and legalese that fills up so many others. But really, it is too short.
I think bringing back the name “Department of War” is a great idea. When I was a teenager, I thought that “Department of Defense” was too Orwellian. So while President Trump is renaming things, let’s make “State” into “Foreign Affairs” again.
This practice is in line with how other Presidential republics do things. The only difference is that their constitutions generally explicitly state that bodies other than the President are also empowered to carry out the law. For example, when the Argentine constitution was drafted in 1853 it imitated the United States to the point that Argentine courts admitted U.S. Supreme Court decisions as precedents, but its authors nonetheless learned from SCOTUS and made some points much clearer from the start. For example, Article 64 made it clear that Congress is authorized:
To make all laws and regulations that may be necessary to carry into execution the foregoing powers, and all other powers vested by this Constitution in the government of the Argentine Confederation [italics mine].
This clause meant that it was understood from the beginning that the Argentine legislature had the right to establish what we Americans would call independent agencies free from the President’s direct control. The Argentine constitution gives Congress the power to make regulations as well as laws — and regulations are defined as the “rules or precepts issued by the competent authority in order to execute a law.” Congress can therefore delegate its regulatory power to independent agencies free from presidential control. (The constitutional amendments of 1994 added some new articles, so this clause is now in Article 75.)
The U.S. does the same thing, but the constitutional authority is murkier. Thus, this post.
I read the second case over and over and really could not wrap my head around the idea that the employee had committed a fireable offense. I mean, wow. Really? I am Latin American, I guess. To be fair, the administrative law judge found my way and the MSPB reversed her.
Adam Levtin (like Steve Vladeck) warns that by the logic of recent SCOTUS cases regarding the National Labor Relations Board and the Merit Systems Protection Board, it will have to decide that the President can fire members of the Fed’s Board of Governors at will. If it doesn’t, he says (and Vladeck implies), then the Supreme Court will have descended into outright partisan hackery.
Noah Smith is worried. So is Dan Drezner. Don Moynihan is clearly frightened. Paul Krugman is up in arms. On the right, John Cochrane is less worried, but would prefer the American central bank to stay the way it is.
I won’t pretend that I lack strong little-c conservative instincts. I do! So my own opinion is that central bank independence is indeed a good thing for countries to have, even if I also think that the European Central Bank in particular is a little too free from political pressure.
12 U.S.C. §§ 263–264, § 343, § 461.
12 U.S.C. § 222.
Congress closed a bunch of obvious loopholes in the Bank Holding Company Act of 1956 with the Competitive Equality Banking Act of 1987.
The Fed got this power under Section 165 of the Wall Street Reform Act, popularly known as “Dodd-Frank.”
National banks are generally exempt from state law and regulation, with a few exceptions.
With the caveat that I am not a lawyer (although sometimes I wonder if I should have been) there are two precedents that could be construed to point the other way — but neither seem to apply. The first is Easton v. Iowa. In 1898 (before there was a Federal Reserve), the State of Iowa sentenced one James Easton to five years at hard labor for taking $100 — $7,443 in today’s money — from the national bank that he ran while knowing full well that the bank was insolvent. SCOTUS held that the state couldn’t do that, since national banks were regulated by federal law.
But Easton only makes it clear that Congress indeed can exempt federally-chartered institutions from state law, which had been the SOP since McCulloch v. Maryland. Nobody argued that Easton made the regulator into an executive agency even though banks can choose to reject federal charters and continue to engage in banking.
A second precedent is clearer but no longer seems to apply. In 1973, one Mrs. Mourning sued Family Publications Services (FPS) when it tried to charge her more for paying her subscriptions in installments rather than all at once, even though FPS had told her that wasn’t the case. This violated a regulation — “Regulation Z” — issued by the Board of Governors under the Truth in Lending Act of 1968. Here SCOTUS said that Congress had empowered the Board to issue such a regulation even though FPS was not a bank. That would indeed make the Board of Governors an executive agency
But since the Fed doesn’t do that sort of thing anymore the point is moot.
Congress transferred the Board of Governors’ consumer-protection functions to the Consumer Financial Protection Bureau (CFPB) under the Wall Street Reform Act of 2010. In 2020, a SCOTUS decision affirmed unitary executive theory and held that the President could fire the CFPB’s head at will. Regulation Z still exists, under CFPB enforcement.
See the last paragraph of the above footnote.
Although I have to tell you that I don’t understand what it means for the French president to be “commander-in-chief” while the Prime Minister is “responsible for national defense.” It seems to work, but I don’t get how. If anyone knows please tell me in comments!