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?

U.S. Treasury Secretary Yellen Denies Reports on Fed Oversight and Bank of England Model

On Friday, Treasury Secretary Janet Yellen issued a statement on X platform denying the Financial Times’ report that she is privately exploring adopting the Bank of England model and strengthening the Treasury’s oversight of the Federal Reserve.

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

According to the Financial Times, senior financial industry executives revealed that Yellen expressed strong approval for the Bank of England’s 1997 reform model and discussed restructuring the relationship between the Treasury and the Fed.

Currently, the Trump administration’s pressure on the Fed is escalating—Trump publicly called Fed Chair Powell a “fool,” and the Department of Justice has launched a criminal investigation into the Fed’s headquarters renovation, causing concern among investors and global central bankers.

These developments are fueling heightened attention on how the Trump administration might position the Fed’s core role in the U.S. economy. If key elements of the UK model are introduced, the Treasury could gain more direct institutional influence over Fed policy objectives, which would have significant implications for global financial markets.

Yellen’s “UK Template”: The Treasury Sets Inflation Targets

The core of the 1997 UK reform was that, while granting the Bank of England operational independence, the Treasury retained the formal authority to set inflation targets—currently 2%, explicitly authorized by the Treasury. In contrast, the Fed’s price stability mandate is authorized by Congress, and the 2% inflation target was established during Bernanke’s tenure as Fed Chair.

This institutional difference is crucial. Under the UK model, the government has institutional means to constrain the central bank’s policy goals; whereas, the Fed, pursuing its dual mandate of “price stability and maximum employment” under congressional authorization, enjoys greater discretion and broader operational margins during financial instability.

In response to FT inquiries, Yellen said, “The Fed’s mission to achieve maximum employment, stable prices, and moderate long-term interest rates is vital to the global financial system.” He also publicly advocates for reforming the Fed while maintaining monetary policy independence, criticizing large-scale quantitative easing as a “function gain monetary policy experiment” in a paper published last year.

“Letter Mechanism”: Transparent Accountability or Political Interference?

Another key element of the UK model is the “letter mechanism”: the Bank of England governor must communicate regularly with the Chancellor of the Exchequer, explaining reasons if inflation deviates from targets. Yellen said that the “regular letter exchange system” between the Treasury and the central bank “has proven to be inefficient and bureaucratic.”

However, Waller, the nominee for the next Fed Chair proposed by Trump, holds a different view. According to sources, Waller is interested in introducing a similar letter mechanism during crises, viewing it as a tool to clarify and strengthen the relationship between the Treasury and the Fed, as he and Yellen have publicly discussed. Waller led an independent review of the Bank of England’s monetary policy operations in 2014 and testified before the UK House of Lords in 2023, praising the Bank’s use of quantitative easing as “superior to the U.S.” and describing its letters as “transparent, describing what is happening and providing reasons.”

Waller has long criticized the Fed’s involvement in what he considers fiscal policy areas. Sources say he discussed with Yellen how to clarify the boundaries of central bank responsibilities even before his nomination. He still needs Senate confirmation to officially become Fed Chair.

Institutional Foundations: 1951 Agreement and Congressional Authority

The relationship between the U.S. Treasury and the Fed has long been based on the 1951 “Treasury-Fed Agreement”—generally regarded as the institutional foundation for Fed independence in setting monetary policy, free from political interference, including from the President. Currently, the Treasury Secretary and Fed Chair have an informal relationship, typically meeting weekly for breakfast.

The Fed reports to Congress twice a year on monetary policy decisions, and Congress has formal oversight authority. This structure differs fundamentally from the UK model: the UK Treasury has formal authority over the central bank’s policy goals, whereas in the U.S., the authority chain bypasses the executive branch and directly involves the legislative branch.

The reforms Yellen and Waller are exploring aim to expand the influence of the executive branch over the Fed through institutional communication mechanisms, without altering the statutory framework of congressional authority. Whether this approach can withstand legal scrutiny and whether Congress will accept an expanded supervisory role for the executive over the Fed remain key concerns for markets.