The situation gets even more complicated when considering the other activities the Fed undertakes, especially during times of crisis, that do not neatly fall into either the monetary or the regulatory bucket, Ms. Judge said. For example, during the Covid-induced economic shock in 2020, the central bank aggressively intervened in a range of debt markets in order to shore up the financial system, working closely with the Treasury Department.
“The lines around what constitutes monetary policy have never been cleanly drawn,” she said.
Jeremy Kress, a former Fed banking regulator who is now a faculty director of the University of Michigan’s Center on Finance, Law and Policy, also noted that the order did not point to any concrete rationale as to why the Fed’s monetary independence was protected and its functions related to supervision and regulation were not, suggesting Mr. Trump could easily change the remit of the directive.
“They simply say one is in scope and one is out of scope with no legal reasoning, and I think that should make Jay Powell very nervous,” Mr. Kress said. “If Powell takes steps that Donald Trump doesn’t like, the next executive order could be on monetary policy.”
Even without that more extreme step, Mr. Alvarez, the former general counsel, warned that the directive, as written, could lead to an erosion of the Fed’s monetary policy independence indirectly. For one, the latitude bestowed to Russell T. Vought, director of the Office of Management and Budget, to review and adjust independent agencies’ budgets could come to bite if, for instance, the president disapproved of certain spending related to economists or other staff members.
“He’s not telling them how to implement monetary policy, but he’s greatly affecting it by reducing the inputs, research and information they have to make monetary policy decisions,” Mr. Alvarez said.
“The way it’s written, if you wanted to do mischief, you could,” he added.