President Donald Trump has had a lot to say about the Federal Reserve since he took office.
He’s called the U.S. central bank “the biggest threat” to the U.S. economy. He’s also called its chair – Jerome Powell – a golfer “who doesn’t know how to putt” and an enemy.
Trump, Powell and Fed independence
Those blatant critiques have for the most part subsided since the Fed took aggressive action to help the economy fortify itself against the coronavirus pandemic, slashing rates to zero and implementing 13 different emergency lending facilities to keep money flowing freely throughout the economy. Trump said on July 1 that he’s getting “more and more happy” with Powell.
But his criticisms have revived an age-old conversation about Fed independence, and at this point, it might be hard for Americans to remember a time when presidents didn’t openly talk about Fed policy — a subject they were previously tight-lip on.
With the presidential elections just two months away, you might be wondering what exactly is in the president’s realm of power when it comes to influencing Fed policy and its officials.
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 has stuck with when he’s been asked about it. For example, correspondent Scott Pelley asked Powell in a wide-ranging interview on CBS’ “60 Minutes” 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?” Earle says, referring to Trump’s most common critique of Powell. “I don’t see any court arguing that, especially when they’re hired for their policy and their academic expertise. 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.”
Whoever wins the 2020 presidential election could also choose not to re-appoint Powell, when his term as chair expires in 2022. If that were the case, he could technically still remain on the board as a governor until 2028.
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. Trump’s latest picks for those spots — Christopher Waller, who is research director at the St. Louis Fed, and the controversial Judy Shelton, who was an adviser to Trump’s 2016 election run — have already cleared the Senate Banking Committee and await full confirmation before the Senate, though Senate Majority Leader Mitch McConnell still hasn’t set a date for when that will take place.
Experts and former members of the Federal Open Market Committee (FOMC) say there’s no room at the Fed for political views, meaning even if Shelton secures the nomination, it would be hard for her to steer the committee in a direction that the president favors. But if she is nominated, it will have solidified Trump’s influence on the Fed’s board of governors — and could potentially pave her path to becoming Fed chair, if Trump wins re-election.
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, who was a professor of economics at Carnegie Mellon University, but he was never confirmed. He died of cancer in December 2019. 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 approves 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 most of Trump’s comments is that they were when the economy was in 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.
Calls are already growing to adjust that mandate, with some Democratic lawmakers including former Vice President Joe Biden wanting the Fed to target the Black unemployment rate — which is often nearly two times as high as White unemployment — rather than the headline joblessness rate.
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.