Central banks possess vast and ever-increasing power. In addition to regulating banks and managing the business cycle via interest rate policy, central banks now finance government borrowing and lend widely to private parties when a crisis arises. With this enormous power come inevitable calls for more central bank accountability, transparency, and legitimacy. In our recent Yale Journal on Regulation article entitled ‘Towards an Administrative Law of Central Banking,’ we explore how administrative law should shape the urgent task of optimizing the use of central banks’ extraordinary powers. We focus on the US Federal Reserve.
As a conceptual matter, the Fed’s enormous exercises of power are no different from what all US administrative agencies do: the Fed is interpreting its governing statutes and making policy choices about how to exercise the discretion Congress left to it through those statutes. The difference is in the breadth of impact: given the importance of these interpretations and policy choices for the global economy and for nearly every American, the Fed’s exercise of administrative power is more momentous than nearly all other administrative agencies.
Despite the Fed’s position at the apex of administrative power, US administrative law, as an academic field, has largely ignored it. The main reason for this neglect is that administrative law conventionally centers on judicial review of agency action. But the Fed rarely finds itself haled into court, and it rarely must go to court to get what it wants. The rarity of Fed litigation is a testament to the Fed’s power and autonomy. Ironically, that same rarity renders the Fed largely invisible in the dominant, court-centered paradigm of administrative law. While there has been attention to the Fed where administrative law blurs into separation of powers, the institution continues to be neglected when it comes to matters in the heartland of administrative law: the Fed’s practices for interpreting law and its processes for making decisions. Conversely, interpretive and procedural issues at the Fed remain virtually ignored by the macroeconomists who pay most attention to the Fed, part of a general blind-spot at the intersection between law and macroeconomics.
This inattention leaves unanswered some of the most basic questions of administrative law as applied to the Federal Reserve: How do Fed officials interpret the statutes that give them so much power? What process, if any, constrains them in the momentous policy choices they make? Do they listen (or explain their choices) to anybody on the outside?
These questions are difficult to answer. The Fed’s recent history is marked by a level of secrecy, an absence of comprehensible legal process, and an institutional closure utterly foreign to most federal regulation, making these questions difficult to answer. Take the two examples that are the focus of our article. On monetary policy, the Fed’s explanation for its historic and non-obvious 2012 interpretation that its statutory mandate to promote ‘maximum employment’ and ‘stable prices’ justified a two-percent inflation target, but no objective target for employment—what then-Vice Chair Janet Yellen called a ‘constitution’ for the Fed—ran to a single page. The Fed’s explanation of the extraordinary 2020 revision of this ‘constitution’—essentially an admission that the 2012 regime no longer worked to accomplish the Fed’s policy goals—was similarly confined to a single page. On emergency lending, the Fed’s claim that law compelled its refusal to rescue Lehman Brothers in 2008—resulting in what former Fed Chair Ben Bernanke admitted was a ‘catastrophe’—has been discussed only in shifting explanations offered by either retired officials or in testimony and memos that the Fed disclosed only in response to a congressional investigation. Given the stakes of that decision, the legal interpretation—itself controversial—is one of the most important instances of statutory interpretation in financial history.
Both of the above instances raise fundamental questions about how the Fed reached the conclusions that it did. In our Article, we begin the project of articulating what the administrative law of the Federal Reserve should be when it confronts similar legal decisions and long-term policy decisions of such extraordinary importance. In this account, we demonstrate that the Fed’s interpretive methods, procedural constraints, and institutional openness or closure can be greatly illuminated by the field of administrative law. A huge amount of scholarship in that field has explored these questions indirectly in asking how courts should review agency interpretation and process. A growing number of studies further examine agency interpretation and process in their own right, casting aside the judicial lens altogether.
Our thesis is that an administrative law of central banking would drive the Fed to take more seriously the advantages of (1) transparency and openness in the agency’s adoption of generally applicable interpretations of law and (2) in its procedures for originating and updating its general long-term policies. We emphasize two related advantages, both drawn from the larger literatures on administrative law and administrative governance. First, transparency and openness can strengthen the Fed’s capacity to signal credible commitments in a way that will help control inflation, limit unemployment, and avert or mitigate financial crises. Second, transparency and openness increase the diversity of input into Fed interpretations and policies. Diversity of input improves these decisions’ factual and predictive accuracy, their legal thoroughness and stability, and thus their effectiveness in carrying out the Fed’s statutory mission.
Our thesis offers multiple concrete policy recommendations. To improve the Fed’s current ad hoc process for revising its ‘constitution,’ the ‘Statement on Longer Run Goals and Monetary Policy Strategy,’ we recommend periodic ‘notice and comment’ and advisory committee procedures similar to those applied in administrative law to improve policy and statutory interpretation. To improve the legibility and credibility of the Fed’s emergency lending, we recommend an accordion-style updating of emergency lending guidance such that all interested parties can understand the limits of emergency lending as those limits evolve pre-crisis, mid-crisis, and post-crisis.
The last twenty five years has seen a transparency revolution in central banking. While central banks used to be cagey about their economic forecasts and possible policy responses, they now inform the public of their forecasts and expectations. The time has come for a similar revolution on the legal side of central banking. Specifically, central banks should apply time-tested instruments of administrative law to enhance the transparency, accuracy, and credibility of their most important legal interpretations and long-term policy decisions.
Peter Conti-Brown is Assistant Professor at The Wharton School of the University of Pennsylvania and Nonresident Fellow in Economics Studies, The Brookings Institution.
Yair Listokin is the Shibley Family Fund Professor of Law at Yale Law School.
Nicholas R Parrillo is Professor of Law at Yale Law School.