Monetary policy and bank regulation are two sides of the same coin. Since private banks create money through lending, any regulatory action (like changing capital requirements) directly influences the money supply. Giving the executive branch control over regulation would undermine an independent monetary policy.

Beyond its stated goals of employment and price stability, the Fed's recent aggressive asset purchases show its primary role is often to ensure smooth market functioning, making it dependent on market signals.

The Fed's intervention in funding markets, while not officially labeled Quantitative Easing, directly helps the Treasury finance its debt, effectively monetizing it and providing critical liquidity to markets.

Central bank independence is a relatively new concept from the 1990s. Historically, central banks operated as junior partners to the government, executing industrial policy. The move to subordinate the Fed to the Treasury is a return to a long-standing historical model.

A new Fed Chair advocating for a smaller balance sheet cannot simply sell assets without causing market volatility. The Fed must first implement complex, long-term regulatory changes to reduce commercial banks' demand for reserves. This involves coordination with the Treasury and is not a quick policy shift.

Despite intense political criticism, a coalition including former Fed chairs, Treasury secretaries from both parties, and major bank CEOs has publicly defended the central bank's independence. This signals that markets view a non-politicized Fed as critical for economic stability, overriding political allegiances.

Over the past few years, the Treasury Department and the Federal Reserve have been working at cross-purposes. While the Fed attempted to remove liquidity from the system via quantitative tightening, the Treasury effectively reinjected it by drawing down its reverse repo facility and focusing issuance on T-bills.

Beyond formal councils, a key communication channel between the Fed Chair and Treasury Secretary is a traditional, regular breakfast meeting. These bilateral talks occur without staff present, allowing for candid, high-level coordination.

Despite the perception of independence, the Federal Reserve historically yields to political pressure from the White House. Every US president, regardless of party, has ultimately obtained the monetary policy they desired, a pattern that has held true since the Fed's creation.