On Aug. 27, the former president of the New York Fed made a jaw-dropping claim. Speaking in a Bloomberg News opinion piece, Bill Dudley argued that the Federal Reserve should take an overtly political stand against President Trump. “There’s even an argument that the election itself falls within the Fed’s purview,” Mr. Dudley proclaimed, “After all, Trump’s reelection arguably presents a threat to the U.S. and global economy.”
Mr. Dudley’s statement, unsurprisingly, stoked serious concerns about the supposed “independence” of the Federal Reserve. As it stands, the Fed is supposed to remain as a neutral arbiter, abiding by its dual mandate to balance low unemployment and stable inflation. It wasn’t designed to pick sides, political or otherwise. And yet, here we are.
It looks like a system of checks and balances is exactly what the Federal Reserve needs after all.
The Federal Reserve has only become increasingly activist as of late, and it is up to the Trump administration to rein them in. In 2015, then-Congressman Mick Mulvaney criticized the Fed for addressing “issues outside of your jurisdiction.” “You’re sticking your nose in places that you have no business to be,” Mr. Mulvaney exclaimed — a sentiment that rings all-too-true today. As the head of the Office of Management and Budget (OMB), Mr. Mulvaney is now in a position to act on those very concerns.
Just last month, the Fed announced plans to develop a service called FedNow, which would allow banks to offer immediate, 24/7 payment services. It would cut the time of processing deposits to and from consumers’ bank accounts from days to minutes without the requirement of holding an account with a third party, like Venmo. The problem is that FedNow is a dangerous usurpation of the OMB’s authority from an increasingly activist, power-hungry Federal Reserve.
Executive Order 12866 states that any regulation posing significant economic impact must be reviewed by OMB’s Office of Information Regulatory Affairs (OIRA) before being formally proposed. Since FedNow will likely cost hundreds of millions of dollars at a minimum, it is certainly significant, and yet the Fed chose to release the proposal without the Trump administration’s reviewal anyway.
Further proving FedNow’s qualification of significant under the executive order is how it is threatening to eliminate an entire private industry, swiping away years of progress and jeopardizing the future consumers’ connectivity. Private companies like The Clearing House have already responded to the need for immediate bank payments by already connecting half of consumer’s demand deposit accounts to instantaneous transfer systems. One-hundred percent connectivity is expected by next year, but the Fed’s central planning can change that in one fell swoop.
Just weeks after FedNow was announced, one existing real-time payment company was flooded with three times the number of inquiries from businesses about their system. The market is responding by sounding the alarm. Businesses are now weary of investing in the private systems because they are well aware of the Fed’s historical tendency to crowd out the marketplace. If a regulation that effectively nationalizes an entire industry and topples business certainty does not qualify as significant, then what does?
Some may argue that since the Fed is an independent agency, it should not have to comply with executive orders. This line of reasoning could not be further from the truth. After all, FedNow goes way beyond the Fed’s charter. Congress gave America’s central bank substantial authority over the nation’s monetary policy, not impunity to run roughshod over the entire private banking industry. The Fed doesn’t operate in the real-time payments business right now, and it should not have the authority to make that decision without guidance from OMB’s Office of Information and Regulatory Affairs (OIRA).
What’s next? The announcing of complete control over credit card issuance and management, or Fed monopolization of the small business and payday loan industries, all under the guise of complete governing independence?
The Fed doesn’t have unchecked power, and the Trump administration — which hasn’t been hesitant to criticize the central bank — needs to recognize as much. Mr. Mulvaney must work with President Trump to re-establish oversight over it. Russ Vought, who runs OIRA at OMB, must be allowed to perform a cost-benefit analysis of the FedNow system. Only then will the Trump administration have the opportunity to kill this harmful proposal once and for all. In doing so, America will move closer to properly constraining the all-too-activist Federal Reserve, reinvigorating our nation’s commitment to checks and balances.
• Andrew Langer is president of Institute for Liberty.
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