Does the Ministry of Finance have the authority to intervene in central bank policy targets? Besant highly praised the "UK central bank reform model" and the "Federal Reserve reform" is beginning to take shape?

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U.S. Treasury Secretary Bessent has recently denied reports about the Fed's regulatory stance and the Bank of England model. Previously, the Financial Times reported that Bessent was privately exploring drawing on the Bank of England model to strengthen Treasury supervision over the Fed.

On Friday, U.S. Treasury Secretary Bessent issued a statement on the X platform, denying the Financial Times report suggesting that the regulatory relationship between the Bank of England and the Chancellor of the Exchequer could serve as a model for the U.S. Treasury and the Fed.

Bessent stated, "The Bank of England has a long history with much to commend, but its operational model has never been considered for replication across the Atlantic."

According to previous reports by the Financial Times, financial industry executives revealed that Bessent had expressed high regard for the UK's 1997 central bank reform model to market participants and held relevant discussions on restructuring the relationship between the Treasury and the Fed.

At present, the Trump administration is escalating its pressure on the Fed—Trump himself has publicly accused Fed Chair Powell of being a “fool,” and the Justice Department has initiated a criminal investigation into Powell regarding the Fed headquarters’ renovation project, causing great concern among investors and global central bank officials.

These developments are drawing heightened investor attention to how the Trump administration positions the Fed’s core role in the U.S. economy. If core elements of the UK model are introduced, the U.S. Treasury could gain more direct institutional influence over the Fed’s policy objectives, which would have far-reaching implications for global financial markets.

Bessent's "UK Template": Treasury sets inflation target

The core of the UK's 1997 reform is that the Bank of England was granted operational independence, while the UK Treasury retained the formal power to set the inflation target—currently a 2% inflation target is explicitly authorized by the Treasury. By contrast, the Fed’s price stability mandate is authorized by Congress, and the 2% inflation target was independently established by the Fed during former Chair Bernanke's tenure.

This institutional difference is crucial. Under the UK model, the government has institutional means to constrain central bank policy objectives; whereas the Fed currently enjoys greater discretion in pursuing its dual mandate of "price stability and maximum employment" as authorized by Congress, with a broader operational scope in times of financial instability.

Responding to inquiries from the Financial Times, Bessent stated: "The Fed's mandate to achieve maximum employment, stable prices, and moderate long-term interest rates is vital to the global financial system." He also publicly supports advancing Fed reforms while preserving monetary policy independence, and in a paper published last year, criticized the Fed’s large-scale quantitative easing as a "functionally amplifying monetary policy experiment."

"Letter Mechanism": Transparency and Accountability or Political Interference?

Another core element of the Bank of England model is the "letter mechanism": the Bank of England Governor must regularly communicate with the Chancellor, and must send an explanatory letter when inflation deviates from the target. Bessent stated that the "regular letter exchange system" between the Chancellor and the Governor "has proved to be both inefficient and bureaucratic."

However, Trump's nominated next Fed chair, Walsh, holds a different view of this mechanism. According to sources, Walsh intends to introduce a similar letter mechanism to that of the Bank of England in times of crisis, seeing it as a tool to clarify and strengthen the Treasury-Fed relationship adjustment advocated by both his and Bessent’s public statements. Walsh chaired an independent review of Bank of England monetary policy operations in 2014 and testified before the UK House of Lords in 2023, saying that the Bank of England’s use of quantitative easing was "superior to the U.S." and praised the letter system for being "transparent, describing what is happening and giving reasons."

Walsh has long criticized the Fed for involvement in what he regards as fiscal policy matters. Sources say that even before his nomination, he and Bessent had discussed clarifying the boundaries of central bank responsibilities. Walsh still requires Senate confirmation before he can formally assume the position of Fed Chair.

Institutional Foundation: The 1951 Accord and Congressional Authorization

For a long time, the relationship between the U.S. Treasury and the Fed has been based on the 1951 Treasury-Fed Accord—this document is widely regarded as the institutional foundation for the Fed’s independence in monetary policy, free from interference from political leaders, including the President. Currently, the relationship between the Treasury Secretary and the Fed Chair is informal: the two usually have breakfast together once a week.

The Fed is responsible to Congress and reports twice yearly on monetary policy decisions, with Congress exercising formal supervisory authority. This structure differs fundamentally from the UK model: the UK Treasury holds formal authorization power over central bank policy objectives, while in the U.S., the authorization chain bypasses the executive and connects directly to the legislative branch.

The reform direction being explored by Bessent and Walsh is essentially to expand the executive branch's influence on the Fed's boundaries by introducing institutional communication mechanisms without altering the congressional authorization framework. Whether this path can stand on legal grounds, and whether Congress would accept the executive branch’s expanded oversight of the Fed, remain the core issues that markets will continue to watch.

Risk Warning and DisclaimerThe market has risks, and investment should be cautious. This article does not constitute personal investment advice, nor does it consider individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable to their particular circumstances. Invest accordingly at your own risk. ```