The Department of Justice’s investigation of Federal Reserve Chair Jerome (Jay) Powell has raised questions about the boundary between legitimate oversight and political interference in monetary policy. At issue are subpoenas related to the cost of renovations at Federal Reserve buildings in Washington and Powell’s prior testimony about those projects—an inquiry that comes amid the president’s sustained public criticism of the Fed over interest rate policy. While scrutiny of government spending is routine, criminal investigation targeting a sitting Fed chair is unprecedented.
To understand the investigation’s historical and institutional context, HKS spoke with Douglas Elmendorf, former dean of Harvard Kennedy School and current Lucius N. Littauer Professor of Public Policy at HKS and Harvard University Distinguished Service Professor. In addition to his service with the Congressional Budget Office, Elmendorf served as a senior economist at the Federal Reserve and a deputy assistant secretary for economic policy at the Treasury Department.
Q: What is the basis for a DOJ investigation of Fed Chairman Powell by this administration?
Federal Reserve Chair Jay Powell announced that the Fed had been served subpoenas related to the renovation of buildings in Washington and the Chair’s testimony about those renovations.
It is completely legitimate for members of Congress and other policymakers to ask why these renovations have become so expensive, as they did last summer. Chair Powell spends a lot of time on Capitol Hill talking with members of Congress privately in their offices, in addition to the hearings in which he testifies. They had lots of opportunities to ask those questions, and it’s totally fair that they do.
What makes the current situation different is the pursuit of possible criminal charges.
This president has been complaining that the Federal Reserve would not cut interest rates enough, very loudly and forcefully, in ways that have not happened in this country for at least 30 years.
Chair Powell by nature is a quiet, thoughtful, deliberate person, and his responses to the president’s attacks on him and on the institution over the past year have been similarly very low key.
But I think after the investigation was announced, he felt there was no choice—that the attacks had gotten to a point where he needed to be forthright with the public about what was happening. So, Chair Powell explained that the subpoenas amounted to further pressure on the Fed from the administration. [In a separate case, the president is also trying to remove Fed Governor Lisa Cook from her position.]
Q: From your experience, how typical is for a president to put pressure on the Federal Reserve?
Decades ago, it was somewhat common for presidents to complain openly about Federal Reserve policies with which they disagreed. But beginning 30 or 40 years ago, there has been a growing understanding by policymakers around the world that the best way to conduct monetary policy is for elected officials to set goals and for central banks to independently make the tactical decisions to meet those goals without political pressure.
In this country, President Clinton took a position that he would not comment openly on Federal Reserve decisions. He stuck to that for the eight years of his presidency. George W. Bush stuck with that for the eight years of his presidency. Barack Obama stuck with it for the eight years of his presidency.
And simultaneously in many other countries, political leaders forswore commenting publicly on what their central banks were doing to implement policies.
“The United States is the central player in international economic and financial activities, so the Fed’s decisions are particularly important for economic and financial conditions around the world.”
Q: What changed?
This administration has taken the view that everything that happens in the execution of the government’s affairs should happen under the control of the president directly. The legal term for this is the unitary executive theory, and there are debates among lawyers and legal scholars about whether the Constitution should be read as empowering a unitary executive or not.
This president and his team are very clear that they think he is the unitary executive and therefore everything should be under his direct control. I think the nature of the president’s specific view about how he thinks the government should work have led him to comment on the Federal Reserve in ways that other presidents have not.
Q: Many financial experts, including your HKS faculty colleague Jason Furman, signed a statement calling this “an unprecedented attempt to use prosecutorial attacks” to undermine the independence of the Federal Reserve board. What do you think?
Yes, I agree very much with their statement, and I’m glad that so many former senior policymakers offered their views so clearly and so promptly. I think it’s important for people in the country, and especially members of Congress, to understand how widespread the conviction is that interfering with the implementation of monetary policy is counterproductive.
I was also struck by a statement by a number of foreign central bank leaders also emphasizing the importance of central bank independence. I don’t know of any precedent for foreign central bank leaders making such a statement on behalf of the Federal Reserve. There are sometimes coordinated statements by central banks around specific kinds of interventions to stabilize financial markets. But this statement of principle about central banking was very important. And I’m not surprised that these foreign central bank presidents think this is very important. The United States is the central player in international economic and financial activities, so the Federal Reserve’s decisions are particularly important for economic and financial conditions around the world. It matters for all the central banks that our central bank is free to do the best it can do.
Q: The stock market has reacted mildly to the news of a DOJ investigation of a Fed Chairman. What do you make of that?
I think if investors believed that the Federal Reserve was going to cut interest rates as low as the president has argued, it would be very disruptive for financial markets because people would expect much higher inflation than we now have. But investors don’t believe that the Fed will do that. Investors believe that institutional safeguards will protect the independence of the Federal Reserve to a high degree.
When support for Chair Powell started to come from former policymakers in this country, from foreign central bankers, even from some members of Congress, I think the investors were reassured that the institutional safeguards would protect the Fed.
But I do worry that investors may be too complacent.
The president will choose the next Federal Reserve chair. The president has already appointed somebody to the Federal Reserve Board. If Chair Powell leaves his governor position when his chairmanship ends, then the president will pick another member of the Federal Reserve Board. So, the president is gaining increasing influence over decisions of the Federal Reserve.
And the president is very clear that he intends to use his influence to get what the outcomes he wants.
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Banner photo by Heather Diehl/Getty Images. Faculty photo by Martha Stewart.