The Fed’s vaunted independence is becoming an issue in the 2024 campaign as supporters and opponents of former President and Republican nominee Donald Trump grow increasingly suspicious of whether he would seek to reduce the Fed’s autonomy if he is re-elected.

Although neither Trump nor his campaign has taken an official position on this so far, the Republican candidate has said he would not reappoint Powell as Fed chairman, and he even discussed firing Powell in 2018. In addition, some of Trump's informal advisers have proposed ideas for possible changes to the Fed that could give him more power over the central bank.

This has led many to believe that if Trump is elected as the US president, he will take action on this issue in his second term. In late May, a Bloomberg survey showed that 44% of respondents believed that Trump would weaken the independence of the Federal Reserve or limit its power. In contrast, only 5% believed that Biden would "cross the line" and make monetary policy remarks or call for interest rate cuts if he were re-elected.

So, what can and cannot the US president do to the Federal Reserve? Will the Federal Reserve suffer a "catastrophic disaster" if Trump is re-elected?

Appointment of Federal Reserve officials

The president's most direct power over the Fed is through appointments to fill vacancies on the board, including the chairman. Fed governors serve 14-year terms, while the chairman serves four-year terms. All of these people are members of the Federal Open Market Committee, which helps set monetary policy, such as interest rates.

Powell succeeded current U.S. Treasury Secretary Janet Yellen as Fed Chairman in 2018. Trump's appointment of Powell broke the historical precedent of "retaining" the Fed Chairman selected by the previous president. Biden reappointed Powell as Fed Chairman in 2021.

Powell's current term as chairman will expire in 2026. If he is re-elected, his next term may not be as long as 4 years, but may end in 2028, because his term as a Fed governor (the chairman is also a governor) will expire in 2028. According to relevant US laws, he will not be eligible to serve as a governor again. However, the Federal Reserve Act provides that "after the expiration of the term, members of the Board of Governors shall continue to serve until their successors are appointed." Therefore, if the then US President does not appoint a new governor for the time being, Powell will be able to continue to serve.

The next U.S. president will have two more opportunities to appoint new Fed governors, in 2026 and 2028. This is a small percentage of the 12-member FOMC, which is made up of Fed governors and rotating voting members. Regional Fed presidents are not appointed by the president, but are elected by their respective boards and approved by the Board of Governors.

In addition, the president's appointments to the Fed's governor, chairman and vice chairman positions must be confirmed by the Senate, a process that serves as a vetting process for the nominees. Biden's initial pick for vice chairman of supervision, Sarah Bloom Raskin, had to withdraw from the 2022 nomination process due to strong opposition from Senate Republicans. Opposition from lawmakers also doomed some of Trump's Fed appointees to failure.

Removing the Fed Chairman

The harshest, most direct way a president can issue a warning to the Fed is to remove its chairman, as Trump threatened to do in 2018 when he became angry with Powell over a series of rate hikes. But legal scholars say the president cannot do that easily, or at all.

Section 10 of the Federal Reserve Act states that members of the Board of Governors (including the Chairman) may be “removed by the President for cause.” Legal scholars generally interpret “for cause” as serious misconduct or abuse of power.

However, Peter Conti-Brown, a professor at the University of Pennsylvania's Wharton School and a historian of the Federal Reserve, said it is very unclear whether the president can remove the Fed chairman because the law does not clearly provide for the position's "for cause" protection (i.e., it can only be removed for specific reasons). In any case, due to the "for cause" protection for Fed governors, even if the chairman is removed, he can remain on the board and can continue to serve as the chairman of the FOMC, which is responsible for setting interest rates. Because the FOMC chairman is selected by the board members, not the president.

Rewriting the Federal Reserve Act

Long-term plans to reshape the Fed could also involve changing the law that created the central bank, which would require action by Congress.

The Heritage Foundation, a conservative think tank, included several such recommendations in a document for its Project 2025, which seeks to develop a policy agenda for the next president. It calls for reforms that would put more constraints on how the Fed sets monetary policy and regulates the nation’s largest banks. For example, it recommends changing the Fed’s dual mandate of inflation and employment to a focus on inflation alone.

Pressure on the Fed to change is also coming from other quarters. For example, after the Fed's ethics scandals 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 do more to address the risks that climate change poses to the financial system. The "Fed Up" campaign of the Center for Popular Democracy advocates that the Fed prioritize the employment aspect of its dual mission, arguing that raising interest rates could hurt vulnerable workers.

Pressuring people publicly or privately

Whether they are Democrats or Republicans, American presidents will try to influence the Fed by exerting pressure publicly and privately. Historically, presidents will personally express displeasure and may even engage in some personal intimidation.

In 1965, former President Lyndon Johnson summoned then-Fed Chairman William McChesney Martin Jr. to his Texas ranch to reprimand him for raising borrowing costs. In the 1970s, former President Richard Nixon put pressure on then-Fed Chairman Arthur Burns, which some economists believe led to the Fed not taking strong measures to curb inflation at the time. As president, Trump has publicly denounced the Fed and Powell for a series of interest rate hikes during his tenure.

Biden has taken a different tack, predicting in March that the Fed would cut rates and reiterating that claim in April, but largely refraining from publicly criticizing the Fed's policies. In contrast, congressional Democrats have been more direct. For example, Massachusetts Senator Elizabeth Warren reacted to the news of the ECB's rate cut by posting on social platform X that "Jerome Powell needs to be part of the plan."

Powell has repeatedly stressed that the Fed is independent of politics and only considers what is best for the economy when making policies. At an event in May, when Powell was asked about the independence of the Fed from the executive branch, he said "there is no doubt about it." He also said that lawmakers from both parties support the independence of the central bank.

But the Fed is still widely seen as operating in a political context. Fed leaders work closely with the Treasury Department and spend time building ties with lawmakers on Capitol Hill. The central bank's decisions must factor in the economic impact of presidential and congressional decisions, such as tax cuts or massive spending programs.

Historian Conti-Brown said the Fed's financial regulatory decisions sometimes take into account feedback from across the political spectrum. "The Federal Reserve is actually a very political institution," Conti-Brown said, but "politics and partisanship are completely different."

Why does the Fed need independence?

Generally, politicians like lower interest rates because making money cheaper stimulates consumers to buy more things immediately, which boosts economic growth. And for supporters of modern central banks, independence from political pressure enables central banks to take necessary but sometimes unpopular measures, such as raising interest rates to fight inflation. The argument for independence is that the economy will benefit more in the long run if investors and consumers trust that the central bank will do whatever is necessary without worrying about political consequences.

In May, the White House Council of Economic Advisers published a blog post emphasizing the Biden administration’s “strong support” for central bank independence, citing research and history to show that central banks are better able to control inflation if they have independence and therefore the public’s trust.

The article is forwarded from: Jinshi Data