Without Chevron, the Fed has crucial questions to address
Published with Paul H. Kupiec in The Hill.
On June 28, the Supreme Court overturned the Chevron Doctrine, which previously allowed unelected government bureaucracies to interpret their governing statutes to stretch and expand their agencies’ powers.
Now, unless regulatory powers are explicit in law, federal agencies’ interpretations of their authority will no longer be given deference by the courts when challenged. Congress should remove legislative ambiguities or risk the uncertainty of potential judicial challenges to Federal Reserve powers.
The Federal Reserve is the most powerful unelected body in the country. What could the demise of the Chevron Doctrine mean for the Fed?
When Sen. Jack Reed (D-R.I.) posed this question during the Fed’s recent semiannual congressional testimony, Chairman Jerome Powell said the Fed was “very focused on reading the actual letter and intent of the law and following it very carefully,” calling the practice “a strong intuitional value that we have.”
“Those are brand-new decisions that just came down, and we are in the process of studying them,” Powell said.
Considering the Fed’s history of expanding its powers using creative interpretations of its authorizing legislation, Powell’s answer made us chuckle. The demise of the Chevron Doctrine gives the Fed’s legal eagles lots to ponder.
First, consider the all-important issue of preserving the value of the dollar. In the Federal Reserve Act, Congress instructed the Fed to pursue “stable prices” — a self-evidently clear direction. The Fed, with no congressional debate or approval, reinterpreted its congressional assignment as a duty to promote inflation at the rate of 2 percent per year forever.
Thus, the Fed, without any change in its congressional remit, construed “stable prices” to mean quintupling prices — reducing the dollar’s purchasing power by 80 percent — over an 80-year lifetime.
Stable prices? George Orwell may still be alive, well and working at the Federal Reserve Board.
While obfuscation of the term “stable prices” may be the most consequential example of the Fed’s failure to abide by the letter of the authorizing legislation, it is by no means unique. Consider the Federal Reserve Board’s decision to design its own disingenuous accounting standards to hide the fact that the combined Fed system losses — $183 billion since September 2022 — have consumed all of the system’s capital, and then some.
The Federal Reserve Act also requires the Fed to publish informative financial statements of the Federal Reserve Banks. While the Fed reports losses, it does not subtract losses from its retained earnings, as any bank it regulates must and as standard accounting rules require.
Instead, astonishingly, the Fed classifies its losses as an asset. It books its losses as the opaquely titled “Deferred asset — remittances to the Treasury.” This dubious accounting allows the Fed to report its capital as positive $43 billion when using standard accounting rules, its capital is negative $140 billion. We have been unable to find the law that authorizes the Fed to create a new accounting standard.
Next, consider the Federal Reserve Board’s decision to continue paying the expenses of the Consumer Financial Protection Bureau (CFPB) notwithstanding the fact that the Fed’s payments to the CFPB have been violating the funding provision of the Dodd-Frank Act since September 2022.
The Dodd-Frank Act created the CFPB and provides for its funding. The act does not classify the CFPB’s funding as a Federal Reserve Board expense, but instead, directs that the CFPB be funded out of the Federal Reserve system’s earnings.
The Dodd-Frank Act requires the board of governors to “transfer to the bureau from the combined earnings of the Federal Reserve System, the amount determined by the director to be reasonably necessary.”
Congress could have made CFPB expenses an explicit expense of the Federal Reserve Board and instructed the Fed to pay the CFPB’s expenses using Federal Reserve Act authority whether the Fed had any earnings or not. But it didn’t.
In May, the Supreme Court affirmed the constitutionality of using Fed earnings that otherwise would have been transferred to the Treasury to pay the CFPB’s expenses. This decision did not consider whether it was legal for the Fed to transfer money to fund the CFPB when the Fed has had no combined earnings.
Under a clear reading of the Dodd-Frank Act and the Supreme Court’s recent decision, when the Fed has no earnings, it has no earnings to transfer to the CFPB, just as it has no earnings to send to the Treasury.
The Fed has not offered any legal defense for continuing to pay the CFPB’s expenses. It owes one to Congress and the public.
Other policy questions arise in the post-Chevron world. These include the authority to take on massive balance sheet risk without approval from Congress — a risk that has generated more than a trillion dollars of unrealized market value Fed losses, engineering international agreements governing domestic bank capital and credit regulations that are, in all but name, treaties that should require Senate approval and actively embracing executive branch climate change policies without explicit congressional authority.
The demise of the Chevron Doctrine creates new uncertainty regarding Federal Reserve powers not clearly enumerated in current law. Unless Congress preemptively addresses legislative ambiguities, the economy will face the risks associated with the uncertain outcomes of potential judicial challenges to Federal Reserve powers.