• The president’s recent comments about Fed Chair Powell raises risks of threats to Fed independence

• Supreme Court precedent would appear to guarantee Powell’s job security

• However, that precedent is currently being reviewed

• If precedent is overturned and Fed independence is chipped away at, inflation and interest rates could move higher

During the first Trump administration, the president frequently expressed his dissatisfaction with Fed Chair Powell, but there was no significant impact on the independence of the Federal Reserve’s policy decisions. In the second Trump administration, there have been potentially more concrete efforts to align the Federal Reserve’s actions more closely with the preferences of the White House. In this note, we first review the unique and sometimes confusing structure of the Federal Reserve and FOMC. We then discuss the traditional understanding of how the president influences the Fed, followed by the unique routes the current administration could pursue to overturn that traditional understanding. We then discuss why economists almost universally think it’s a good thing to have monetary policy decisions made independent of the electoral cycle. We conclude by discussing risks to the outlook.

Fed refresher

To review, Fed interest rate policy is set by the FOMC, which is made up of twelve people: the seven members of the Fed’s Board of Governors, based in Washington, DC, the president of the NY Fed, and an annually rotating group of four of the 11 remaining regional reserve bank presidents. The seven members of the Board of Governors are nominated by the President and confirmed by the Senate. A full term is 14 years, with one term beginning every two years on even-numbered years. A member who fills an unexpired portion of a term may be reappointed to a new 14-year term.

The Chair and the Vice Chair of the Board are nominated by the President from among the Governors and are confirmed by the Senate. They serve a term of four years, which can be renewed by the president. After their four-year term in a leadership role is over, a Chair or Vice Chair can still serve out their remaining term as Governor, though historically this is rare. The last time someone remained as Governor after having been a Chair was Marriner Eccles in the late 1940s. Note, also, that the Chair and Vice Chair of the FOMC (as distinct from the Federal Reserve Board) are chosen by the FOMC, not by the president, though historically the Committee has chosen the Chair of the Board to serve as the Chair of the FOMC. The formal powers of the Chair, of either the Board or the FOMC, aren’t much greater than that of a regular governor or Committee participants. The Chair presides over meetings and represents the Fed before Congress. But most of the power of the leadership stems from the historical deference that the Board or the FOMC normally accords the Chair. Table 1 presents the terms of Governors and leadership positions (the Vice Chair for Supervision is currently vacant).

The presidents of the 12 regional Reserve Banks are chosen by the banks’ boards of directors, though with the involvement and assent of the Federal Reserve Board in DC. The entire slate of 12 presidents’ terms are recertified every five years, on the February of years beginning with a 1 or 6. So next February the Board will vote on whether the reserve bank presidents keep their jobs. Usually this recertification is a formality of no real significance.

Where the president usually comes in

In normal times, the president’s influence on Fed policy is through personnel appointments to the Board. As Table 1 indicates, this implies only limited ability of the president to influence the composition of the Board (or the FOMC) in his remaining time as president, even assuming Powell leaves the Board after his term as Chair is complete next year. Most governors don’t serve their full 14-year term, often for personal reasons, so it’s possible that if the president is patient he will able to fill more vacancies on the Board. There are other, less direct, ways in which the president can try to influence monetary policy.

Historically, the Fed Chair would meet with the president, though this has occurred with decreasing frequency. And as was the case in Trump 1.0, the president can publicly remark, through social media or other channels, on his views of monetary policy with the hope of influencing the Chair and the FOMC. In that earlier period, however, most Fed observers (including ourselves) believed the Fed’s actions were dictated by the state of the economy, with no apparent influence from the president.

…and in unusual times

The president recently posted on social media that “Powell’s termination cannot come fast enough!” Along with NEC Chair Hassestt’s remarks last Friday, this has increased speculation that the president will seek to remove Powell from either his role as Fed governor, Chair of the Board, or both. The seven governors on the Federal Reserve Board in Washington can only be removed “for cause”—a phrase that historically has been understood as malfeasance or dereliction of duty, not policy disagreements. In a 1935 case, Humphrey’s Executor v. United States, the Supreme Court unanimously ruled that the president couldn’t remove a member of the FTC who had “for cause” protection for political differences.

Ever since then, most had thought that that case had settled any question about the job security of Fed Governors. And the job security of Fed governors should go a long way toward insuring the independence of the Fed and of monetary policy. The current administration, however, is testing whether the precedent in Humphrey’s Executor will be upheld by the current Supreme Court. Two members of independent agencies, the National Labor Relations Board (NLRB) and the Merit Systems Protection Board (MSPB) were recently fired by the administration. A lower court has ruled those firings unlawful, the administration appealed, and the Supreme Court has decided to hear the appeal.

This points to a few paths. First, the Court could side with the administration. The administration could then use that win to remove whichever governors they wish. At an extreme, they could stack all seven governorships with administration loyalists. Next February, the Board could then decline to recertify the reserve bank presidents, and in a year’s time all 19 FOMC participants could be administration loyalists.

Second, the Court could rule in the administration’s favor in the NLRB and MSPB cases, but consider the Federal Reserve as a separate case, possibly to the benefit of Fed governors. Third, the Court could rule against the administration, thereby preserving Powell’s job as governor.

This last case wouldn’t necessarily settle matters entirely. There is a separate question as to whether the administration can demote a governor from their leadership position as either Chair or Vice Chair. Unlike governors, the Federal Reserve Act does not explicitly give “for cause” protection to leadership positions, though no administration has ever sought to demote someone from such a role. It’s possible Governor Barr, formerly Vice Chair for Supervision, stepped down from his leadership role so that he couldn’t be used as a test case.

If the administration successfully pursues this route, another branch will sprout on the tree of possibilities. The administration would surely hope that a demoted Powell would follow other ex-Chairs since Eccles and leave the Fed entirely. However, as seen in Table 1, Powell could stay on as a governor into the last year of the president’s term. Not only would this block an opening for the administration to nominate another governor, but Powell could be selected as Chair of the FOMC, thereby retaining effective leadership for monetary policy. As mentioned above, the explicit powers of a leadership role (on either the Board or the FOMC) are limited, but historically a Chair is accorded considerable deference by other Committee members.

Economists generally believe it is beneficial to remove monetary policy from the political cycle. The short time horizon of the electoral calendar could otherwise tempt politically oriented monetary policymakers to try to stimulate the economy even when it is inappropriate from a longer-run perspective. International evidence indicates that central banks that have more political independence tend to foster lower, more stable inflation. Closer to home, the historical record suggests that political interference contributed to poor monetary policy in the late ‘60s and early ‘70s, with unfavorable consequences for inflation developments.

Any reduction in the independence of the Fed would add upside risks to an inflation outlook that is already subject to upward pressures from tariffs and somewhat elevated inflation expectations. Moreover, market participants would likely demand greater compensation for inflation and inflation risks, thereby increasing longer-term interest rates, weighing on the outlook for economic activity and worsening the fiscal position. It has been hoped that these adverse consequences would dissuade the president from threatening Fed independence, though so far the president has often followed through on his intentions.