Does the Ministry of Finance have the authority to intervene in the central bank's policy objectives? Bentzen highly praises the "UK Central Bank reform model," and the "Federal Reserve reform" shows initial signs?

Wall Street News

Reports indicate that U.S. Treasury Secretary Basant is privately exploring the possibility of adopting the Bank of England’s 1997 reform model, under which the government has institutional mechanisms to impose constraints on the central bank’s policy objectives; whereas the Federal Reserve currently enjoys greater discretionary space in pursuing the dual mandate of “price stability and full employment” as authorized by Congress. If the “British template” is implemented, the U.S. Treasury may gain formal power to set inflation targets. However, Basant later came forward to deny these claims, stating that there has never been any consideration to replicate its operational model across the Atlantic.

U.S. Treasury Secretary Basant has recently denied reports regarding the Federal Reserve’s regulatory stance and the Bank of England model, following a Financial Times report that he was privately discussing the potential to strengthen the Treasury’s oversight of the Federal Reserve based on the Bank of England model.

On Friday, U.S. Treasury Secretary Basant issued a statement on the X platform, denying the Financial Times’ report that the procedural model between the Bank of England and the Chancellor of the Exchequer could serve as a paradigm for the relationship between the U.S. Treasury and the Federal Reserve.

Basant stated, “The Bank of England has a long history with many commendable aspects, but we have never considered replicating its operational model across the Atlantic.”

According to previous reports from the Financial Times, financial industry executives revealed that Basant expressed high recognition of the Bank of England’s 1997 reform model to market participants and engaged in discussions about restructuring the relationship between the Treasury and the Federal Reserve.

Currently, the Trump administration is ramping up pressure on the Federal Reserve—Trump himself has publicly accused Federal Reserve Chairman Powell of being a “fool,” and the Department of Justice has already launched a criminal investigation into Powell over the renovation project of the Federal Reserve’s headquarters, causing significant concern among investors and global central bank officials.

These developments are prompting investors to pay close attention to how the Trump administration positions the Federal Reserve’s core role in the U.S. economy. Should key elements of the British model be introduced, the U.S. Treasury could gain more direct institutional influence over the Federal Reserve’s policy objectives, which would have profound implications for global financial markets.

Basant’s “British template”: Treasury sets inflation targets

The core of the 1997 reform in the UK is that while the Bank of England gained operational independence, the Treasury retained the formal power to set inflation targets—currently a 2% inflation target explicitly authorized by the Treasury. In contrast, the Federal Reserve’s mandate for price stability is authorized by Congress, and the 2% inflation target was established by the Federal Reserve itself during the tenure of former Chairman Bernanke.

This institutional difference is crucial. Under the British model, the government has institutional means to impose constraints on the central bank’s policy objectives; whereas the Federal Reserve currently enjoys greater discretionary space in pursuing the dual mandate of “price stability and full employment” as authorized by Congress, with broader boundaries for action during periods of financial instability.

In response to inquiries from the Financial Times, Basant stated, “The Federal Reserve’s mission to achieve full employment, stable prices, and moderate long-term interest rates is vital to the global financial system.” He also publicly advocated for reforms to the Federal Reserve while preserving its independence in monetary policy, and criticized the Federal Reserve’s large-scale quantitative easing program in a paper published last year as a “functionally enhancing monetary policy experiment.”

“Letter mechanism”: Transparent accountability or political interference?

Another core element of the Bank of England model is the “letter mechanism”: the Governor of the Bank of England must regularly communicate with the Chancellor of the Exchequer, and when inflation deviates from the target, must write a letter explaining the reasons. Basant stated that the “regular letter correspondence system” between the Chancellor and the Governor of the central bank “has proven to be both inefficient and bureaucratic.”

However, Trump’s nominee for the next Federal Reserve Chair, Waller, holds a different view of this mechanism. According to insiders, Waller intends to introduce a letter mechanism similar to that of the Bank of England during times of crisis, viewing it as a tool to clarify and strengthen the adjustments to the relationship between the Treasury and the Federal Reserve as publicly expressed by him and Basant. Waller previously led an independent assessment of the Bank of England’s monetary policy operations in 2014 and testified to the House of Lords in 2023 that the Bank of England’s use of quantitative easing was “superior to that of the U.S.” and praised the relevant letters as “transparent, describing what is happening and providing reasons.”

Waller has long criticized the Federal Reserve for involving itself in matters he believes fall within the domain of fiscal policy. According to insiders, he had discussions with Basant even before being nominated on how to clarify the boundaries of central bank responsibilities. Waller still needs Senate confirmation to officially assume the role of Federal Reserve Chair.

Institutional foundation: The 1951 Agreement and Congressional authorization

The relationship between the U.S. Treasury and the Federal Reserve has long been based on the 1951 “Treasury-Federal Reserve Agreement”—this document is often seen as the institutional foundation for the Federal Reserve’s independent formulation of monetary policy, free from interference from political leaders, including the President. Currently, the relationship between the Treasury Secretary and the Federal Reserve Chair is informal, with the two typically having breakfast together once a week.

The Federal Reserve is accountable to Congress, reporting to Congress twice a year on monetary policy decisions, and Congress has formal oversight authority over the Federal Reserve. This structure is fundamentally different from the British model: the Treasury has formal authorization power over the central bank’s policy objectives, while in the U.S., the authorization chain bypasses the executive branch and connects directly to the legislative body.

The reform direction discussed by Basant and Waller essentially aims to expand the executive branch’s influence over the Federal Reserve’s boundaries through the introduction of institutional communication mechanisms, without touching the framework of Congressional authorization. Whether this approach can stand on legal grounds, and whether Congress will accept the expansion of the executive branch’s oversight authority over the Federal Reserve, will be the core issues of ongoing market attention.

Risk Warning and Disclaimer

The market has risks; investors should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one’s own risk.

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Editor: Guo Jian