President Donald Trump isn’t happy about the Federal Reserve.
He’s called the U.S. central bank “the biggest threat” to the U.S. economy. He’s compared its chair – Jerome Powell – to a golfer “who doesn’t know how to putt,” and most recently, to President Xi Jinping of China.
“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” Trump tweeted Aug. 23.
Trump, Powell and Fed independence
Trump’s criticisms have revived an age-old conversation about Fed independence, and it’s made experts question whether Powell and his colleagues might have folded to political demands behind the scenes. Trump has long called for the Fed to cut borrowing costs and halt its normalization of the balance sheet, and they fulfilled those demands at the July rate-setting meeting.
But even though Trump’s not happy with the Fed – and specifically the chairman whom he appointed – he can’t do much about it. The Fed was designed to be independent from U.S. politics, and when the conversation comes up in public, Powell stresses that monetary policy is set without political input.
It’s clear, however, that the president does have a prominent pulpit when it comes to the central bank – and he may have more influence over the Fed than you might think.
What authority does Trump have over the Fed?
Here are all the ways in which a U.S. president can and cannot affect the Federal Reserve – and what authority the chief executive has over the chairman.
- A president can appoint – and technically fire – the Fed chair
- A president does appoint the majority of voting officials
- But a president is not the sole arbiter of who takes those seats
- A president can voice his concerns and participate in the conversation – and Trump’s not the only one who’s done it
- But a president cannot bar the Fed from raising interest rates
1. A president can appoint – and technically fire – the Fed chair
Trump nominated Powell to the post of chief central banker back in 2017. He could also be the one to take Powell out, technically.
Members of the Fed’s board of governors can serve a maximum of 14 years, pending a fresh nomination from the president and confirmation from the Senate at the end of each term. Governors serve two-year terms, while chairs and vice chairs’ terms last four years.
Fed chiefs, however, can serve any time that went unused by their predecessors. (Alan Greenspan, for example, was Fed chair for nearly 18.5 years because Paul Volcker only served as chair for eight).
But Section 10 of the Federal Reserve Act of 1913 specifies that governors can be “sooner removed for cause by the president.”
The Fed chair is considered a governor, meaning this provision likely extends to him or her as well, says Sarah Binder, professor of political science at George Washington University, who studies the Fed’s relationship with Congress.
What constitutes as a “cause,” however, is not exactly clear, though it likely doesn’t include a disagreement on the direction of interest rates.
“Just because the president doesn’t agree with your policy choices doesn’t mean he can dismiss you,” Binder says. “Powell’s response more than once has been: ‘I’m not going anywhere.’”
That’s at least the message Powell communicated in March during a wide-ranging interview on CBS’ “60 Minutes.” When correspondent Scott Pelley asked Powell whether Trump could fire him, Powell flat out said, “No.”
“The law is clear that I have a four-year term,” Powell said on the long-running television show. “I fully intend to serve it.”
No president has attempted to fire a Fed chief before using the “cause” provision, so no legal precedents have been set. (Though the Truman administration forced Thomas McCabe to resign after about three years as Fed chair).
But if a president did decide to kickstart a legal battle to oust the chief U.S. central banker, it’s likely that the courts will look to similar roles for illumination, such as the chairman of the Federal Trade Commission, says Pete Earle, a research fellow at the American Institute for Economic Research.
The legal standards surrounding the FTC chairman say that this official can only be removed for “inefficiency, neglect of duty or malfeasance in office.” Applying that to the Fed chair, however, might be a little more complicated, Earle says.
“Is raising rates a neglect of duty? I don’t see any court arguing that, especially when they’re hired for their policy and their academic expertise,” Earle says. “The Fed is charged with this duty of adjusting rates as it sees fit.”
When it comes to the current presidency, however, Trump has shown he’s not afraid to break from presidential precedence, Earle adds.
“Trump is going to be Trump,” he says. “If he decides to, no clause in Section 10 of the Federal Reserve Act or any sort of yelling by the media or backlash from Congress will stop him if that’s what he decides he wants to do.”
2. A president does appoint the majority of voting officials
Ousting a Fed chief seems particularly difficult for a president – but there are still other ways in which the chief executive can influence the Fed.
The president has the authority to pick each of the seven members on the Fed’s board of governors, who have permanent voting positions on the rate-setting Federal Open Market Committee.
Four of Trump’s picks for the board of governors have already made it onto the board: Chairman Jerome Powell, Vice Chair Richard Clarida, Vice Chairman for Supervision Randal Quarles and Governor Michelle Bowman. Only one governor, Lael Brainard, was picked by former president Barack Obama.
There are currently two vacancies on the board of governors, but they won’t be empty for long, if the president’s recent announcements are any indication. Trump announced in March that he was nominating Stephen Moore, economic commentator and a fellow at the D.C.-based think tank The Heritage Foundation. He also said Thursday that he plans to pick former pizza chain executive Herman Cain for the second unoccupied position.
Moore’s nomination has garnered intense opposition from notable economists and politicians across the gamut, with a top concern being that Trump decided to nominate him to the Fed solely for his monetary policy leanings rather than his qualifications for the job.
Rep. Carolyn Maloney, a Democrat from New York who serves as vice chair of the Joint Economic Committee, stressed in a note to the Senate Banking Committee that Moore is “superbly underqualified for the role.” Greg Mankiw, a Harvard professor who served as chairman of the White House’s Council of Economic Advisors, wrote in a blog post that Moore “does not have the intellectual gravitas for this important job.”
The White House’s top economic advisor Larry Kudlow told reporters at an event hosted by the Christian Science Monitor in D.C. that he stood by the nomination.
“We are fully behind him, fully behind him,” Kudlow said. “He’s a smart guy. I think he would be a breath of fresh air at the Fed. So far, it’s all systems go.”
Moore wrote in a column for the WSJ that the Fed was a threat to global growth. In a March interview on Bloomberg Television, he called the Fed’s December rate hike a “substantial mistake.” He also suggested that he didn’t have much experience with monetary policy.
“I’m kind of new to this game, frankly, so I’m going to be on a steep learning curve myself about how the Fed operates, how the Federal Reserve makes its decisions,” Moore said on Bloomberg TV.
3. But a president is not the sole arbiter of who takes those seats
Just because the president picks those who occupy seats on the board doesn’t mean they ultimately make it through. The Senate Committee on Banking, Housing, and Urban Affairs confirms each nomination, while others simply dissolve from the process.
Trump previously nominated Marvin Goodfriend, a professor of economics at Carnegie Mellon University. He was never confirmed. Nellie Liang, a Brookings Institution fellow, withdrew her name from consideration after facing Republican and Wall Street opposition.
It’s hard telling what the committee, currently a Republican majority, will be looking for in those confirmations. But it’s safe to say it won’t be an easy road ahead for the candidates, Earle says. Now that the president has made his biases known, the committee will likely be paying attention toward any kind of slant either candidate has, in addition to their backgrounds.
“They’re going to want them to be somewhat mediating in their judgments now that they know what the president is looking for,” according to Earle. “They probably won’t be too specifically focused on whether they’re hawkish or dovish people, but whether they’re wholly aligned with the president and aren’t too much on one side or the other.”
It’s clear that Fed independence is on the Senate’s mind. In March, Powell faced questions about his communications with the president, while Sen. Mike Brown made sure to specifically ask Clarida and Bowman during their confirmation hearings whether they believe the Fed should be free from political control.
“It’s going to be very difficult to get someone on the board who is going to be lavishly devoted to what Trump thinks policy should be,” Earle says. “And that’s how it should be. That’s the way the checks-and-balance system is supposed to work.”
Also insulating the Fed from presidential influence are the 12 regional Fed banks across the country. Presidents do not control who runs them. Instead, directors form a search committee and hire a firm to identify “a broad, diverse, highly qualified candidate pool,” according to the Federal Reserve. The Fed’s board of governors then approve the final pick.
4. A president can voice his concerns and participate in the conversation – and Trump’s not the only one who’s done it
Whether it’s Trump’s comments that the Fed is “going loco” with interest rate hikes, or his blunt statement that “he’s not the least bit happy” with his pick to lead the central bank, one thing is for certain: The president has strong opinions about the Fed.
Nothing specifically prevents a president from voicing his concerns, according to Earle. It’s more of an unspoken rule to keep your opinions about monetary policy tight-lipped.
Believe it or not, though, Trump’s not the first president to explicitly comment on such policies. Harry Truman, Lyndon Johnson, Richard Nixon, Ronald Reagan and George H.W. Bush have all explicitly commented on the direction of interest rates, according to Earle’s research.
In a phone call with then-Fed chair Arthur Burns, Richard Nixon said, “Independent! You get it up. I don’t want anymore nasty letters from people about it. OK?”
Presidents, however, tend to weigh in on monetary policy when the economy is doing poorly, Binder says. What’s unusual about Trump’s comments is that they’re taking place when the economy looks set to reach its longest expansion on record.
“The economy by most gauges was going gangbusters – that’s what’s so unusual about Trump leaning on Yellen in 2018 and Powell,” Binder says. “It undercut his own message by criticizing the raising of rates, which was supposed to make sure that the recovery kept going.”
5. But Trump cannot officially bar the Fed from raising interest rates
When experts say the Fed is independent, that’s mostly because the central bank has the power to raise, lower or maintain interest rates without approval from the Legislative or Executive branches. This means that there’s nothing Trump can really do to prevent the Fed from raising rates.
CEA’s Hassett said in an October interview with CNBC that Trump respects the independence of the Fed.
Still, that hasn’t stopped people from fearing that the president’s comments do have some sort of influence over policy, Binder says.
“The president has a very loud bully pulpit, even without his Twitter feed,” Binder says. “There is no more salient political actor in the United States. Nobody can compete with the level and spotlight of media attention. In that sense, he’s not one voice amongst others; he is one very loud and pointed voice – to which the Fed has to respond.”
Powell and Clarida met with Trump and Treasury Secretary Steven Mnuchin at the White House for dinner back on Feb. 4. Immediately afterward, they issued a statement to likely keep people from panicking about political interference, Binder says.
Rethinking what it means to be independent
The irony is that the Fed’s independence is granted by the very people who have the power to take it away, points out Irwin Morris, professor and chair of the Department of Government and Politics at the University of Maryland. It’s not as if Congress has left the Federal Reserve Act of 1913 unchanged. They most notably revised it in the aftermath of the Great Recession, to reflect the Fed’s new regulatory and supervisory responsibilities.
Stripping the Fed of its powers, however, would not be easy.
“There would be political and economic costs of a drastic change of the nature of the institution,” Morris says. “Everyone would have to be on board, and how many policymaking initiatives have had that sort of overwhelming support recently? Not many.”
For this reason, it’s best to rethink Fed independence, Binder says. Just because an institution is non-partisan, doesn’t mean it’s apolitical, she says.
“Central banks claim they’re independent, even though we can think about the ways in which they are sitting in the middle of the political system,” Binder says.