How the Fed Is and Isn’t ‘the Supreme Court of Finance’

The Federal Reserve is sometimes called “the Supreme Court of finance.” That’s a stretch, of course, but the analogy does make you think about the nature of both institutions. Now that they’re both in the news it seems like an opportune time to look at their similarities and differences.

1. Both have big white buildings in Washington, completed just two years apart during the Depression: 1935 for the Supreme Court and 1937 for the Fed. The Supreme Court went for ornate Corinthian capitals to look imperial while the Fed opted for the sleek look of stripped classicism.

2. One of the two is a bank and the other is a court (I had to get that out of the way early).

3. Supreme Court: robes. Fed: no robes. Historical footnote: The first chief justice, John Jay, “lent a colorful air to the earlier sessions by wearing robes with a red facing,” according to the court’s website.

4. The Federal Reserve system has 12 regional reserve banks; the Supreme Court hears cases from 13 Circuit Courts of Appeals. Eight cities have one of each: Atlanta, Boston, Chicago, New York, Philadelphia, Richmond, San Francisco and St. Louis.

5. A Black woman has never served on either the Supreme Court or the Federal Reserve Board, but President Biden aims to change that. On Jan. 14 he nominated Lisa Cook, an economist at Michigan State University, to the Fed board. He has also said he will nominate a Black woman to fill Stephen Breyer’s seat on the Supreme Court.

6. The Supreme Court is, you know, supreme, like Diana Ross. It calls itself “the highest tribunal in the nation” and “the final arbiter of the law.” The Fed is more self-effacing: It says central banks need to be independent, but “at the same time, the Federal Reserve must be accountable to Congress and the American people for its actions.”

7. Terms of office are 14 years without possibility of renewal for the Fed and lifetime for the Supreme Court. An organization called Fix the Court says that justices should be limited to one 18-year term, which would make the court more like the Fed.

8. The Supreme Court is enshrined in the Constitution, whereas the Fed was created by Congress through the Federal Reserve Act of 1913, hence it could be dissolved by Congress if push came to shove.

9. Both are headed by men who earned degrees from prestigious law schools in 1979. John Roberts, the chief justice, was born in Buffalo and went to Harvard and Harvard Law School. Jerome Powell, the Fed chair, was born in Washington and went to Princeton and Georgetown University Law Center.

10. Both institutions honor precedent, although the Fed isn’t as bound by it as the court is. At the moment the Fed is operating according to its own “Statement on Longer-Run Goals and Monetary Policy Strategy,” which was adopted in 2012 and most recently amended in 2020.

11. The Fed is more powerful than the court because it controls the economy. No, wait, the Supreme Court is more powerful because it decides the law of the land. Hmm … it seems we have a disagreement on this one.

12. Barnacles are easier to remove than Fed governors and Supreme Court justices. Fed governors can be removed “for cause,” but courts have interpreted that to mean inefficiency, neglect of duty or malfeasance, not policy disagreement, says Peter Conti-Brown of the University of Pennsylvania’s Wharton School. As for the high court, Justice William O. Douglas suffered a debilitating stroke on Dec. 31, 1974, but for nearly 11 months refused to step down. His fellow justices decided to put off any decisions in which he would have the deciding vote.

13. Both bodies are magnets for protesters. Homebuilders protested high interest rates in the early 1980s by mailing the Fed bricks and blocks of lumber. Last month abortion-rights activists stood outside the Supreme Court dressed in black robes and holding poles on top of which were giant heads of the nine justices.

14. President Andrew Jackson defied both the high court and the central bank of his day. He refused to enforce an 1832 Supreme Court decision protecting Cherokee Indians from removal from their homeland in Georgia. In 1833 he managed to shut down the Second Bank of the United States, a predecessor of the Fed, by removing all federal funds from it. Its charter expired three years later.

15. Today almost nobody thinks we should get rid of the Supreme Court but some — like Ron Paul, the former congressman and presidential candidate who wrote the book “End the Fed” — think the Fed shouldn’t exist. Shades of Andrew Jackson.

16. The chief justice loses a fair bit of the time. Roberts voted with the majority in just 66 percent of cases with divided decisions in the term that began in October 2014, according to Scotusblog. The Fed chair, in contrast, always wins (almost). Unanimous votes on the rate-setting Federal Open Market Committee are the norm. There were headlines about “record dissent” in 2019 when three voters — three of 10 — disagreed with the chair.

17. Dollar bills are called Federal Reserve notes, not Supreme Court notes. Score one for the Fed!

18. I’ll end with this nicely put paragraph from the abstract of an October paper by John O. McGinnis, a law professor at Northwestern University:

“The Supreme Court and the Federal Reserve, twin pillars of the liberal market order, have never been systematically compared. Yet as elite institutions in a democratic political world, they face parallel problems in carrying out similar functions of maintaining the precommitments to a stable rule of law and a stable value of money, respectively. Both face a counter-majoritarian difficulty of justifying their decisions on occasion to go against popular will. In response, both tie themselves to rules in order to cabin their own discretion and to prevent epistemic mistakes common in small groups of insulated decisions makers. Yet as a descriptive matter in emergencies both transcend rules to keep the republic steady.”

Number of the week

1.9 percent

The estimated increase in U.S. labor productivity, measured as the output per hour of work, from the third quarter to the fourth quarter of 2021, according to the median of economists’ estimates collected by FactSet.

Productivity fell 5.2 percent in the third quarter from the second, its worst performance since 1960. “Despite the Q3 productivity pullback,” says Action Economics, a commentary service for financial market professionals, “we’ve generally seen a productivity acceleration through the pandemic, as the exit of low-wage workers from the labor pool, and heightened hours-worked by the remainder, has lifted productivity on net.” The Bureau of Labor Statistics will release the official number on Thursday.

Quote of the day

“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so.”

— Jerome Powell, the Federal Reserve chair, speaking of the Federal Open Market Committee in a news conference on Wednesday

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