The Fed, the White House and the skinny accounts

The skinny
There are two ways to look at the developments surrounding the Federal Reserve and skinny accounts and the White House over the past few days.

On the one hand, the Fed has already been spending a lot of time looking into ways to get nonbanks inside its regulatory umbrella, and nothing that's happened this week changes that. Or, the Fed is trying to fend off a president who is actively trying to control it. I actually think both things are involved here.

On Wednesday, the president issued an executive order telling the Fed to review and streamline their fintech regulations. The conclusion of that review was preordained by the EO: grant more master-payment accounts to nonbank fintechs. It gave the central bank about four months to do this. Given that the central bank's actions, with good reason, can be measured more accurately in geological timeframes than in human ones (I exaggerate, but not by much), four months would be a blistering-fast dash.

Later that day, the Federal Reserve released its latest proposal for the so-called "skinny" accounts. It was not significantly different from the proposal it released in December, though the central bank said this new proposal incorporated some of the public comments it received on the earlier proposal. The new proposal itself now gets a 60-day public comment period, and Christopher Waller, the Fed governor who's become the face of the skinny-accounts proposal, thinks the framework could be in place by the end of the year, which has been his projected timeline for some time.

I don't believe the moon landing was faked, I don't believe the Earth is flat, and I also don't believe the timing here was coincidental. It sure seems like the Fed knew the EO was coming and was prepared for it, which really isn't much of a conspiracy theory, as far as those things go. But it does raise a question or two.

When I saw the EO, my first thought was, to what degree does the president control the Fed? I don't mean this president specifically, I mean in general. Yes, it was a rhetorical question. The president nominates Fed leadership, but the Federal Reserve is not an agency that is nestled inside the executive branch, such as the Treasury, the Justice Department, Labor, Agriculture, you get the idea. So, nominally, the president can't really order the Fed to do anything with the master accounts.

But this president specifically has been trying to assert himself over what goes on inside the Eccles Building. The president had been feuding with former Fed Chair Jerome Powell since the start of his second term. He tried to pressure Powell into lowering rates and had the Justice Department threaten to indict him over alleged improprieties. Even though Powell is now out as chair (though very notably staying on the board) and Kevin Warsh is in, was the executive order and the Fed's quick response with an updated skinny-account proposal part of this dance over control of the central bank? 

I don't know. And, does it matter? Waller's been working on the skinny accounts since last year, and the Kansas City Fed gave Kraken a conditional account earlier this year as a sort of proof-of-concept to see how it would work. The Fed was moving in this direction on its own long before the president "ordered" them to do it. So maybe this whole thing with the EO is a proverbial big nothingburger. The president ordering the Fed to do something it was already doing. 

On the other hand, central bank independence is a cornerstone of the economy. So much of how the market functions is a result not of laws of physics but psychology. The Fed chair can, with just a few words, send asset prices and markets around the world booming or careening. Markets work as well as they do, I'd argue, because people believe the Fed is an impartial arbiter trying to maintain balance in the economy. Which is why we have had only two major economic crashes since its formation, in 1929 and 2008 (I don't count 2020, that was a result of the pandemic). Before the Fed came around, the economy crashed regularly: there were so-called panics in 1819, 1837, 1857, 1873, 1884, 1893, 1901, and 1907. It was after the last one that the country's elite were fed up enough that they created an institution to stop the endless busts: the Federal Reserve.

If people stop believing in the Fed's independence, the 21st century may look more like the 19th century than the 20th century. Which is why this executive order is about more than just fintechs and skinny accounts.