Source: Jin10 Data

The independence that the Fed is proud of is becoming a topic of the 2024 election, as supporters and opponents of former President and Republican candidate Trump are increasingly skeptical: will he seek to reduce the autonomy of the Fed if he is re-elected?

Although to date, Trump and his campaign team have not taken a formal position on this, the Republican candidate has said that he will not reappoint Powell as Fed chairman, and has even discussed dismissing Powell in 2018. In addition, some of Trump's informal advisers have proposed ideas about changes to the Fed that could give him more power over it.

This has led many people to believe that if Trump is elected President of the United States again, he will take action on this issue during his second term. A survey conducted by Bloomberg at the end of May showed that 44% of respondents believed that Trump would weaken the Fed's independence or limit its power. In contrast, only 5% of people believed that Biden, if re-elected, would "cross the line" by commenting on monetary policy or calling for a rate cut.

So, what can the U.S. President do with the Fed, and what can't he do? Will the Fed suffer a "catastrophe" because Trump is re-elected?

Appointment of Fed officials

The most direct power that the President has over the Fed is to fill vacancies on the Board of Governors by appointing personnel, including the position of Chairman. Fed board members serve a 14-year term, while the Chairman serves for four years. These people are all members of the Federal Open Market Committee (FOMC), which is responsible for participating in the formulation of monetary policies such as interest rates.

Powell succeeded current U.S. Treasury Secretary Yellen as Fed Chairman in 2018. Trump's appointment of Powell broke with the historical precedent of "continuing" to elect a Fed Chairman previously chosen by the President. Biden reappointed Powell as Fed Chairman in 2021.

Powell's current term as Chairman expires in 2026. If he continues to be re-elected, his next term may not be four years long, but may end in 2028, as his term as a member of the Fed Board of Governors (the Chairman is also a member of the Board) will expire in 2028. Under relevant U.S. laws, he will not be eligible to serve as a Board member again. However, the "Federal Reserve Act" stipulates that "after the term of office expires, members of the Board of Directors shall continue to hold office until their successors are appointed". Therefore, if the future U.S. President does not appoint new members of the Board at that time, Powell will be able to continue to serve.

The next U.S. President will have two opportunities to appoint new Fed governors in 2026 and 2028, which only accounts for a small percentage of the 12-member FOMC composed of Fed governors and rotating voting members. Regional Fed presidents are not appointed by the President but are elected by their respective boards of directors and approved by the Board of Governors.

In addition, the positions of Fed governors, Chairman, and Vice Chairman appointed by the President must be confirmed by the Senate, a process that can serve as a review of the candidates. Due to strong opposition from Senate Republicans, Biden's initial nominee for Vice Chairman of Supervision, Sarah Bloom Raskin, had to withdraw from the 2022 nomination process. Legislative opposition is also likely to doom some of Trump's Fed appointments.

Dismissal of the Fed Chairman

The most severe and direct way the U.S. President can influence the Fed is by dismissing the Fed Chairman, as Trump threatened to do when he was angry at Powell for a series of rate hikes in 2018. But legal scholars say the President cannot easily or simply do so.

Section 10 of the U.S. Federal Reserve Act stipulates that Board members (including the Chairman) can be "dismissed by the President for cause". Legal scholars generally interpret "cause" as serious misconduct or abuse of power.

However, Peter Conti-Brown, a professor at the Wharton School of Business at the University of Pennsylvania and a Fed historian, said that whether the President can dismiss the Fed Chairman is very vague because the law does not provide specific protection for the position's "cause" (i.e., can only be dismissed for specific reasons). In any case, due to the "cause" protection of Fed governors, even if the Chairman is dismissed, he can continue to serve on the Board and as the Chairman of the FOMC responsible for setting interest rates, because the FOMC Chairman is selected by Board members rather than the President.

Rewrite the Fed Act

Revamping the long-term plans of the Fed may also involve revising the law that created the Fed, which requires congressional action.

Several proposals of this kind are included in the Traditional Foundation's 2025 project report. The project aims to set the policy agenda for the next President of the United States. It calls for reforms that put more restrictions on the way the Fed formulates monetary policy and regulates America's biggest banks. For example, it proposes changing the Fed's dual mandate of inflation and employment to focus only on inflation.

Pressure to make changes to the Fed is also coming from other quarters. For example, after a moral scandal at the Fed in recent years, lawmakers from both parties are pushing for greater transparency in the Fed system. Environmental and consumer rights groups are also lobbying the Fed to take more steps to address the risks climate change poses to the financial system. The Fed Up movement of the People's Democratic Center advocates that the Fed prioritize the employment aspect of its dual mandate, arguing that rate hikes may harm vulnerable workers.

Public or private pressure

Regardless of whether they are Democrats or Republicans, US presidents try to influence the Federal Reserve through both public and private pressure. Historically, presidents have personally expressed dissatisfaction and may even engage in some personal intimidation.

In 1965, former US President Lyndon Johnson summoned then-Fed chairman William McChesney Martin Jr. to his farm in Texas to berate him for raising borrowing costs. In the 1970s, former US President Richard Nixon applied pressure to then-Fed chairman Arthur Burns. Some economists believe that this led to the Fed failing to take strong steps to curb inflation at the time. As president, Trump has publicly criticized the Fed and Powell for their series of rate hikes during his term.

Biden has adopted a different strategy. He predicted rate cuts by the Fed in March and reiterated that stance in April, but has generally refrained from publicly criticizing the central bank's policies. By contrast, comments by Democratic congressional members have been more direct. For example, US Senator Elizabeth Warren of Massachusetts responded to news of the European Central Bank's rate cut by posting on social media, "Jerome Powell needs to get on board with this plan."

Powell has repeatedly emphasized that the Fed is independent of politics and considers only the most favorable economic factors when formulating policy. In a May event, when Powell was asked about the Fed's independence from the executive branch, he said, "There can be no doubt." He also said that lawmakers from both parties support the central bank's independence.

But people generally believe that the Fed operates under a political backdrop. Fed leaders work closely with the Treasury Department and spend time building relationships with lawmakers on Capitol Hill. Fed decisions must consider the economic impact of presidential and congressional decisions, such as tax cuts or large-scale spending plans.

Historian Conti-Brown said the Fed's financial regulatory decisions sometimes take into account feedback from various political factions. "The Fed is actually a highly political institution," Conti-Brown said, but "political and partisan struggles are completely different."

Why does the Fed need independence?

Generally speaking, politicians like to lower interest rates because making money cheaper can immediately stimulate consumers to buy more, thus promoting economic growth. For modern central bank supporters, independence from political pressure allows the central bank to take necessary but sometimes unpopular measures, such as raising interest rates to combat inflation. The reason for supporting independence is that if investors and consumers believe that the central bank will take all necessary measures without worrying about political consequences, the economy will benefit more in the long run.

In May, the White House Council of Economic Advisers published a blog post emphasizing the Biden administration's "firm support" for central bank independence and citing research and history to demonstrate that central banks can better control inflation if they have independence and therefore gain public trust.

Editor/Lambor