Law and Custom as Constraints on the FOMC

The Federal Open Market Committee, which controls the supply of money in the United States, may be the country’s most important agency. The chair of the committee is often dubbed the second most powerful person in Washington, only deferring to the President himself. Financial scholars and analysts obsess over the institution, leading to a rich tradition of FOMC Kremlinology, veneration, and second-guessing in business schools and economics departments.

But legal scholars have been less entranced by the committee, put off, perhaps, by the fact that the institution has never been checked by the courts or the Administrative Procedure Act. As a result, there has been no effort to come to grips with the administrative law of the FOMC.

The committee enjoys a legal mandate that shields its discretion to a remarkable degree. The principal claim in my paper is that this shield, combined with the imperatives of bureaucratic organization in an institution whose raison d’etre is stability, has turned the FOMC into an agency governed by internally developed tradition in lieu of externally imposed constraints. The makeup of the committee, the materials that it consults before rendering monetary policy decisions, its voting mechanisms, and the way its decisions are promulgated are products of a mélange of evolving custom and statutory permissiveness.

One might argue that some combination of law and custom explains what happens in most agencies. But the degree of reliance on tradition sets the FOMC apart. No one worries about the customs governing evidence presentation and voting order on multimember boards like the Securities and Exchange Commission or the National Labor Relations Board, but they are subjects of scrutiny at the FOMC. By the same token, APA law, rather than traditions such as that of the FOMC’s so-called “beige book,” governs what goes into the record before, say, the Environmental Protection Agency or Commerce Department make their factual findings. And Supreme Court decisions like Motor Vehicle Manufacturers Ass’n v. State Farm Mutual Automobile Insurance Co. mean that the decisions rendered by most agencies are substantially lengthier, and strive for substantially less ambiguity, than those of the FOMC.

It is possible that this sort of development of routinized custom might be expected for agencies with few legal constraints. If so, the FOMC is an example of an institutional tendency, one that might have particular application in other forms of financial regulation. A mix of tradition and legal constraint are a feature of administrative constraint in that field, where litigation providing definitive opinions on required process is rare, and informal—and often nontransparent—oversight a norm. An account of the FOMC that jibes with the way this sort of regulation works might serve as a prod or a comparator for other accounts of the administrative law of financial oversight.

Given this theme, the article makes the following additional points:

  • The FOMC enjoys the sorts of broad delegations that other New Deal agencies benefit from, only more so; the orders issued by the committee at the conclusion of each of its eight annual meetings do not fit within the traditional paradigms of administrative rulemaking or adjudication, leading courts to eschew any effort to review those decisions as committed to the agency’s discretion. Because it enacts its policies through market transactions, rather than by adjusting the rights and duties of regulated industry (unless it is engaged in a bailout), courts have been willing to cede their traditional role of review.
  • Given its free hand, the FOMC might be expected to be an empire builder. But in reality, it has only expanded its remit with regard to the sort of transactions it takes on, which have moved beyond the purchase and sale of federal government debt to include positions in a broader range of financial assets, as the financial crisis exemplified.
  • The modest problems that the FOMC has endured at the hands of the branches that monitor independent agencies like it—the courts and Congress—have reflected its extraordinary independence and relative opacity. The courts have turned away a series of plaintiffs, including two senators, concerned about the breath of the delegation of power over the economy to the committee, and the mechanism of appointment of its members. Congress has occasionally fretted about the black box within which the committee makes its economy-changing decisions. However, in 1990 Congress removed legislation passed in the 1970s designed to require more reporting from the committee, suggesting that it, too, is cowed by the idea of subjecting the agency to much legislative oversight.
  • The committee makes decisions in a procedurally consistent but increasingly lengthy and elaborate way. Simple correlations between the transcripts of these meetings (length, size, mood, number of times the chair spoke) the ultimate decision made by the FOMC, and a number of leading economic indicators, found one intriguing relationship between attendance and the direction of the federal funds rate. There may be some promising research directions available for this sort of analysis.

If the above observations are meant to make a descriptive case about the way the FOMC makes decisions, the question arises whether we should regret its distance from traditional sorts of administrative procedure. The FOMC’s procedural uniqueness is a function of its independence; that independence is justly celebrated.  We can live with the irregularities and experiments offered by the idiosyncratic procedures of financial regulation in general, and with the FOMC in particular.

The preceding post comes to us from David Zaring, Associate Professor of Legal Studies and Business Ethics, at the Wharton School, University of Pennsylvania. The post is based on his recent article, which is entitled “Law and Custom on the Federal Open Market Committee” and available here.