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 Bessette recently denied reports regarding the Federal Reserve’s regulatory stance and the Bank of England model. Previously, the Financial Times reported that Bessette was privately exploring the possibility of adopting the Bank of England model and strengthening the Treasury’s oversight of the Fed.

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

Bessette 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 Bessette 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 continues to escalate—Trump publicly called Fed Chair Powell a “fool,” and the Justice Department has launched a criminal investigation into the Fed’s headquarters renovation, causing concern among investors and global central bankers.

These developments are fueling investor focus on how the Trump administration might redefine 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 profound implications for global financial markets.

Bessette’s “UK Template”: Treasury Sets Inflation Targets

The core of the 1997 UK reform was that: while the Bank of England gained operational independence, the Treasury retained the formal authority to set inflation targets—currently a 2% inflation goal 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” authorized by Congress, enjoys greater discretion and broader operational margins during financial instability.

In response to FT inquiries, Bessette 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 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”: Transparency 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, explaining reasons if inflation deviates from the target. Bessette said that the “regular letter exchange system” between the Treasury and the Bank of England “has proven to be inefficient and bureaucratic.”

However, Waller, nominated as the next Fed Chair by the Trump administration, 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 Bessette have publicly discussed. Waller led an independent review of the Bank of England’s monetary policy operations in 2014, and in 2023 testified before the UK House of Lords, praising the Bank’s use of quantitative easing as “superior to the U.S.” and commending the transparency of the letters, which “describe what is happening and provide reasons.”

Waller has long criticized the Fed’s involvement in what he considers fiscal policy areas. According to sources, even before his nomination, he had discussions with Bessette on clarifying the boundaries of central bank responsibilities. 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”—a document often 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 reform proposals discussed by Bessette and Waller essentially aim to expand the influence of the executive branch over the Fed through institutional communication mechanisms, without altering the core congressional authorization framework. Whether this approach can withstand legal scrutiny and whether Congress will accept an expanded supervisory role for the executive over the Fed remain key issues for market attention.