Source: Global Macro Insights
Authors: Wu Shuo, Lin Yan
In this round, the asymmetric monetary policy has caused U.S. Treasury rates to remain at elevated levels for longer than in previous cycles, resulting in more prolonged damage to the real economy. The inability to cut interest rates as aggressively as in past rate hikes is due to the persistent specter of inflation. Federal Reserve officials, attempting to balance both sides of the Phillips Curve, have grown noticeably more hesitant following the October rate cut.
At this juncture, swift interest rate cuts may require political intervention. Compared to other stakeholders, the White House has a stronger sense of urgency for rate cuts. The actual power of the U.S. government lies in fiscal policy; without rate cuts, excessive issuance of U.S. Treasuries becomes challenging, leaving the fiscal authorities without 'ammunition.' Trump’s eagerness to increase influence over the Federal Reserve is precisely based on this premise.
Although the screening process for the current Federal Reserve chair candidate has entered the final stage, Trump's ambition to interfere in interest rate decisions clearly extends beyond this. As we noted in our report“Historical Reflections—How Has the Fed Maintained Its Independence?”even if Trump replaces the Fed chair, it would be difficult to avoid repeating the historical mistakes of the Martin era—where the new chair could still uphold independence. Moreover, even if the new chair fully complies with Trump’s intentions, the FOMC meetings involve collective decision-making by 12 members (7 governors + 5 regional Fed presidents), making it hard for the chair alone to dictate overall outcomes.
Therefore, Trump’s core objective is to place as many representatives as possible within the Federal Reserve to enhance his influence during interest rate deliberations. This implies that Trump’s intervention in the Fed is far from over; he will reconstruct the Fed’s power structure through a “three-step strategy” to align it entirely with short-term political goals:
First, promote trusted allies to serve as the "shadow chair" (i.e., pre-selecting candidates for the Fed chair nomination) to ensure that the overall direction of monetary policy aligns with his expectations—a move that marks only the beginning of his interference plan;
Second, focus on securing a majority of seats on the Federal Reserve Board. Currently, Trump’s camp holds three seats and requires just one more to form a majority. The Cook case in January next year will become a critical juncture, and close attention should be paid to any further pressure or replacement actions against current Chair Powell and other board members.
Finally, at the end of February next year, the presidents of the regional Federal Reserve Banks will face a concentrated transition. We estimate that Trump will leverage his allies within the Board of Governors to intervene in some of the appointments, pushing more dovish members into the decision-making layer.
Specifically, how does the Federal Reserve make decisions? Although the Chairman of the Federal Reserve holds the highest influence, the FOMC's decision-making mechanism is not dominated by a single entity but rather operates through a collective decision-making framework consisting of seven Board of Governors members and five regional Federal Reserve Bank presidents (totaling 12 votes) to achieve a balance of power. This means that if Trump wants the Federal Reserve’s decisions to serve his political intentions, he must install an absolute majority of “allies” (requiring 7 votes) within the institution.
Among them, the seven members of the Board of Governors, including Powell, form the core decision-making group. Currently, Trump has successfully appointed three governors: Bowman and Waller during his first term, and Milan, who filled the vacancy left by Kugler. This means that Trump needs only one more nomination to secure a majority on the Federal Reserve Board, obtaining four stable dovish votes — which is also the core reason behind his persistent pressure on Cook and Powell to resign.
Therefore, Trump’s demands on Powell may not stop at his resignation as Chairman of the Federal Reserve. According to legal provisions, after Powell steps down as chairman, he can continue to serve as a governor until 2028, influencing the Fed's decisions. Although historically it is rare for former Fed chairs to remain as governors (only Eccles stayed on as a governor for three years after stepping down), and Powell must consider political pressures and his personal “future,” the probability of him remaining as a governor after leaving the chairmanship is low, but uncertainty remains.
The outcome of the court's ruling on the Cook case in January next year may directly determine whether Trump can gain early control of the majority on the Board. If Trump successfully dismisses Cook or if Cook resigns under political pressure, this would be the most desirable outcome for Trump, allowing him to install loyalists and thereby occupy four seats to form a majority on the Board. However, even if Cook manages to retain his position, Trump is unlikely to back down and may further threaten or “target” other Fed governors.
What makes the majority on the Board more attractive to Trump is its authority over the appointment of regional Federal Reserve Bank presidents. Even with a majority of four seats on the Board, complete dominance over rate-cutting decisions cannot be achieved because regional Fed presidents hold five seats (including the permanent seat of the New York Fed and four rotating seats from the remaining 11 Fed districts). Therefore, for Trump to secure a majority within the FOMC, he would need the support of at least three regional Federal Reserve Bank presidents.
In recent years, the influence of regional Federal Reserve Bank presidents within the FOMC has been growing. We reviewed dissenting votes cast during every Federal Open Market Committee meeting since 1936. Among these, Federal Reserve governors have cast 227 dissenting votes, while regional Federal Reserve Bank presidents, despite holding fewer seats, have cast 278 dissenting votes. Moreover, since the 21st century, almost all dissenting votes have come from regional Federal Reserve Bank presidents, whose impact on interest rate decisions has become increasingly significant.
From a policy stance perspective, historical data shows that regional Federal Reserve Bank presidents tend to favor tighter monetary policies: since 1936, among the dissenting votes cast by Federal Reserve governors, only 30% supported tighter policies; however, in comparison, out of the 278 dissenting votes cast by regional Federal Reserve Bank presidents, 200 votes (72%) supported tightening, while only 44 votes (16%) supported easing, demonstrating a stronger inclination toward contractionary policies. Thus, Trump must pay close attention to the monetary policy preferences of regional Federal Reserve Bank presidents.
One of the core responsibilities of the Federal Reserve Board is the final approval of the appointment of regional Federal Reserve Bank presidents, and the period before the end of February next year presents the best opportunity. Regional Federal Reserve Bank presidents serve five-year terms, elected by the boards of their respective regional reserve banks, but their appointments require final approval from the Federal Reserve Board. Coincidentally, the terms of all 12 regional Federal Reserve Bank presidents are set to expire at the end of February next year. If Trump can secure a majority on the Board before then, he could reshape the entire FOMC power structure by intervening in the appointment process to block the reappointment of hawkish presidents.
Particularly concerning are the extreme hawks such as Logan (Dallas Fed), Hamaker (Cleveland Fed), and Schmid (Kansas City Fed), who have recently expressed opposition to the October rate cut, with Schmid even casting a dissenting vote at the October meeting. Although Schmid’s next voting turn will not occur until 2028, both Logan and Hamaker represent districts that will be voting members in 2026 and will participate in next year’s rate-cutting decisions. If they seek reappointment, they are likely to face strong opposition from Trump and the Board.
In summary, the two key milestones that the market needs to focus on are the Cook case hearing in January next year and the appointment and removal of regional Fed presidents at the end of February. However, for Trump, the process of interfering with the Federal Reserve's independence is bound to be fraught with challenges, especially when it comes to prosecuting Fed governors, which touches upon the institutional foundation of the separation of powers in the United States. The judicial trial phase may encounter multiple obstacles. Excessive interest rate cuts could also trigger concerns about a rapid rise in inflation, and market anxiety may form external constraints. It is not ruled out that the newly appointed Fed chair and governors might uphold their independence, given that the term of a Fed governor is much longer than that of Trump, meaning they still have a longer road ahead.
Risk Warning: Significant changes in U.S. trade and economic policies; unexpected escalation of tariffs leading to a sharper-than-expected slowdown in the global economy and increased market volatility.
Editor/melody
