US Treasury Secretary Besant has recently denied reports concerning the Federal Reserve's regulatory stance and the Bank of England model. This follows a Financial Times report suggesting Besant was privately exploring the possibility of adopting aspects of the Bank of England model to strengthen Treasury oversight of the Fed.
On Friday, US Treasury Secretary Besant issued a statement on platform X refuting the Financial Times report which posited that the procedural model between the Bank of England and the UK Chancellor of the Exchequer could serve as a template for the US Treasury-Fed relationship. Besant 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 the earlier Financial Times report, financial industry executives disclosed that Besant expressed strong approval of the UK's 1997 central bank reform model to market participants and initiated discussions regarding restructuring the relationship between the Treasury and the Federal Reserve.
Currently, pressure from the Trump administration on the Fed is intensifying. Former President Trump has publicly criticized Fed Chair Powell as a "fool," and the Justice Department has launched a criminal investigation into Powell concerning the Fed headquarters renovation, causing deep concern among investors and global central bank officials.
These developments are drawing significant investor attention to how the Trump administration views the Fed's core role in the US economy. If key elements of the British model were introduced, the US Treasury could potentially gain more direct, institutional influence over the Fed's policy objectives, a change with profound implications for global financial markets.
Besant's "British Template": Treasury Sets Inflation Target The core of the UK's 1997 reform lies in the Bank of England gaining operational independence while the UK Treasury retained the formal power to set the inflation target—the current 2% target is explicitly mandated by the Treasury. In contrast, the Fed's price stability mandate comes from Congress, and the 2% inflation target was established internally by the Fed during former Chair Ben Bernanke's tenure.
This institutional difference is crucial. Under the UK model, the government possesses a institutional mechanism to constrain the central bank's policy goals. The Fed, however, currently enjoys greater discretionary space in pursuing its congressionally mandated dual goals of "price stability and maximum employment," with broader boundaries for action during periods of financial instability.
In response to the Financial Times' inquiry, Besant stated, "The Fed's mission to achieve maximum employment, stable prices, and moderate long-term interest rates is critical to the global financial system." He has also publicly advocated for Fed reform while preserving monetary policy independence. In a paper published last year, he criticized the Fed's large-scale quantitative easing programs as "function-creep monetary policy experiments."
"Letter Mechanism": Transparent Accountability or Political Interference? Another core element of the Bank of England model is the "letter mechanism": the Bank of England Governor must correspond regularly with the Chancellor and write a formal letter explaining the reasons when inflation deviates from the target. Besant commented that the system of "regular letter exchanges" between the Chancellor and the Governor "has proven to be both inefficient and bureaucratic."
However, Trump's nominee for the next Fed Chair, Wash, holds a different view on this mechanism. According to informed sources, Wash is considering introducing a letter mechanism similar to the Bank of England's during crisis periods, viewing it as a tool to clarify and strengthen the adjustments to the Treasury-Fed relationship that he and Besant have publicly suggested pursuing. Wash chaired an independent review of the Bank of England's monetary policy operations in 2014 and testified before the UK House of Lords in 2023, stating that the Bank of England's use of quantitative easing was "superior to the United States," and praised the relevant letters for being "transparent, describing what was happening and giving reasons."
Wash has long criticized the Fed for venturing into areas he considers part of fiscal policy. Sources indicate that even before his nomination, he had discussions with Besant about clarifying the boundaries of central bank responsibilities. Wash still requires Senate confirmation to officially assume the role of Fed Chair.
Institutional Foundation: The 1951 Accord and Congressional Mandate The relationship between the US Treasury and the Federal Reserve has long been underpinned by the 1951 Treasury-Fed Accord. This agreement is widely regarded as the institutional foundation for the Fed's independence in setting monetary policy, free from interference by political leaders, including the President. Currently, the relationship between the Treasury Secretary and the Fed Chair is informal, typically involving a weekly breakfast meeting.
The Fed is accountable to Congress, reporting twice yearly on its monetary policy decisions, with Congress holding formal oversight authority. This structure is fundamentally different from the UK model: the UK Treasury holds formal power to mandate the central bank's policy goals, whereas in the US, the chain of authority bypasses the executive branch and connects directly to the legislative branch.
The reform direction discussed by Besant and Wash essentially involves expanding the executive branch's sphere of influence over the Fed by introducing institutional communication mechanisms, without altering the congressional mandate framework. Whether this approach can be legally sustained and whether Congress would accept an expansion of executive branch oversight over the Fed will be core issues for ongoing market attention.
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