FED: Built Fed tough - for this reason
Even if he had enormous influence, it would be nearly impossible for Trump to upend the Fed.
(We’ve made our full research note available because central bank independence affects all of us)
It would be nearly impossible for Trump to erode the Fed’s monetary policy independence.
The Trump administration's removal of Democrats from the boards of the National Credit Union Administration (NCUA), the FDIC, the FTC, and the SEC has raised alarm bells that the President may try to do the same thing to the Board of Governors of the Federal Reserve System (the Board).1,2 These fears were ratcheted up this week when Treasury Secretary Bessent said on a Bloomberg TV interview that the Administration thinks “about [replacing Chair Powell] all the time3,” and when the President posted to social media that Powell’s “termination cannot come fast enough!4” Central bank independence is the foundation of monetary policy. The erosion, or even perception, that the Fed is responding to the desires of the White House or Congress would put the price stability mandate at significant risk and cause turmoil in financial markets. Thankfully, the decentralized nature of the Federal Reserve System (the System) and the firmly held belief by all Fed policymakers that central bank independence is sacrosanct make it nearly impossible for the administration to influence monetary policy.
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Hurdle 1: The size, composition, and culture of the FOMC
The Federal Open Market Committee (FOMC) is the committee inside the Fed that sets the federal funds rate. It consists of 12 voting members, with seven alternate members who attend meetings and vote on a rotating basis.5 The seven governors who sit on the Board of Governors (the Board) in Washington, D.C., and the New York Fed President, currently John Williams, are permanent voters. The remaining four voting spots rotate annually between the other 11 regional presidents in either a three- or two-year cycle.6 Nonvoting members also attend meetings and share their views on the economic outlook, monetary policy, financial markets, and regulation. That’s an important dynamic as the culture of the current FOMC is one of collaboration – this has not always been true, see Greenspan, Alan – and thus, members can exert influence even if they are nonvoters. The decentralization of the Federal Reserve System (more below), the size of the attending member pool – 19 members – and the now ingrained culture of collaboration, are powerful forces that would push against even a small group of policymakers willing to erode monetary policy independence. Each member still only gets one vote, and as discussed below, presidents and governors have long terms. Many of the most influential policymakers have been on the FOMC for years and came up in the System as economists. They will preserve the culture of independent thought and dissent even if the administration nominates a new governor and/or Chair of the FOMC.
Hurdle 2: Decentralization, the Fed’s superpower
Before discussing the details of how governors and regional Fed presidents are selected, it’s essential to understand how the Federal Reserve System is structured. The belief in decentralization underlies the entire Federal Reserve Act of 1913, which established the Federal Reserve System.7 The System is split between the Board in Washington, D.C., a “.gov” web address, and the 12 regional banks, which are “.org” web addresses. Each regional bank is “separately incorporated and has its own board of directors8.” Those are important distinctions, as the seven governors who comprise the Board of Governors are nominated by the President and approved by Congress, while the 12 Reserve Bank presidents are not. They are selected by a group of directors from the Reserve Bank’s head office board. That means the president would need to influence a group of business and bank leaders with no formal ties to Washington, DC, in different parts of the country. Some may argue that it is still technically possible for an administration to influence small groups of business leaders across the country. We’d respond, “not with how those boards are selected.”
Each regional board comprises three classes of directors: A, B, and C. Class C directors are chosen by the Board of Governors in Washington, D.C., which also designates the Chair and Deputy Chair of the Reserve Bank’s board. In practice, that process is usually bottom-up, with the regional banks suggesting candidates to the Board of Governors. Those suggestions are traditionally respected. Class A and B directors are elected by the member banks in each Federal Reserve District. Each class consists of three directors for a total of nine Reserve Bank directors on each head office board, two-thirds of which are elected. The process for selecting a new regional bank president is undertaken by Class B and C directors9, half of whom are elected. In other words, even if the Trump administration were able to influence the Governors in D.C. to select three Class C directors who want to undermine the Fed’s monetary independence, they would have to influence or override the will of three other directors who were elected in a democratic process far from Washington. And even then, that would be just one regional fed president out of 12. And that’s before we get to the structure of terms for both regional bank presidents and members of the Board of Governors.
Hurdle 3: Overlapping and long terms, everywhere
Bank presidents and governors have long terms spanning multiple U.S. presidential administrations. Governors serve 14-year terms, with one term opening up every two years (in even-numbered years).10 That means the Trump Administration will only be able to nominate two new governors: in 2026 when Governor Kugler’s term expires, and again in early 2028 when Powell’s term ends (assuming he doesn’t step down sooner). In other words, the administration will only directly influence two of the 19 FOMC members.
Regional bank presidents “can serve until they are 65–unless they are appointed after 55, in which case they can serve for a maximum of 10 years or until they’re 75, whichever comes first.”11 The terms for three Reserve Bank presidents are set to expire after this year: Thomas Barkin (Richmond, January 2028), John Williams (New York, June 2028), and Mary Daly (San Francisco, October 2028).12 Anna Paulson was just appointed the new president of the Philadelphia Fed when for when Harker steps down at the end of June.
Again, the selection process for the Bank presidents is decentralized and outside the direct influence of D.C. But even if the administration was able to coordinate on a massive scale, they would only be able to seat three more FOMC members, all of whom would be appointed in the final year, or months, of the Trump administration. Add in the two Board openings that expire during his second term– one is again in the final year of his presidency – and it would still only yield, at most, five sympathetic officials out of 19, two of whom don’t even vote every year. It will take more than that to shift the culture of an FOMC that we believe would show little deference, and perhaps even resist, colleagues who do not believe in the foundational importance of central bank independence.
Hurdle 4: The market reaction
The market reaction to a U.S. President trying to force out the Chair of the Federal Reserve would be apocalyptic. Last week, a near meltdown in the Treasury market forced Trump to walk back most of his “reciprocal tariffs”. Moving against Powell would be a “hold my beer” moment that would wreak havoc on markets and the dollar. The flight of capital would be severe and, paradoxically, lead to tightening financial conditions as demand for Treasurys plummet and yields soar, the exact opposite of what Trump is trying to accomplish by removing Powell. We believe the pain would be so swift and severe that the President would be forced to walk it back immediately or face a systemic financial event. While his darker instincts and some advisors may be girding for a fight, some inside the administration still understand the consequences of rattling markets so severely 13
It's unlikely but not impossible that Trump can fire Powell
It may be impossible for Trump to stack the Fed deck in his favor, but he still may be able to go after King of Hearts. The Federal Reserve Act was amended in 1935 to allow U.S. presidents to fire Fed governors for cause, which has been interpreted as “inefficiency, neglect of duty or malfeasance in office.”14 It’s an ambiguous statement that leaves room for interpretation, and it appears to be getting wrapped up in a case currently in front of the Supreme Court in a case that addresses the legality of Trump’s decision to fire two board members at other independent agencies. Those board members challenged, and the issue has reached the Supreme Court. One line of thinking is that Powell may be at risk if the Court overturns precedent and gives the administration the authority to control independent bodies. Still others believe that even if the Court rules in the President’s favor, the justices may decide to put in a specific carveout for the Federal Reserve. We don’t have a clear view of which scenario is more likely to unfold. Either way, we don’t believe it would significantly erode the Fed’s credibility.
Unfortunately, it may already be too late to avoid a market reaction. Equities and Treasurys would take a dive if the Supreme Court even hinted at the possibility that a U.S. President could remove a Fed Chair. Eventually, things would settle as market participants realize that monetary policy would be mostly unaffected, and that litigation would likely mean that Powell would be able to finish out his term as Chair (he can buck tradition and remain a governor until 2028 if he is not renominated as Chair). In other words, we may already be heading down a path that doesn’t have an easy exit, but the consequences aren’t likely to be as severe as they initially seem.
References
1. Peck, Emily. “Trump Fires Democrats from Key Regulator, Stoking Fears about Fed’s Independence.” Axios, April 16, 2025, sec. Sneak Peek. https://www.msn.com/en-us/money/markets/trump-fires-democrats-from-key-regulator-stoking-fears-about-fed-s-independence/ar-AA1D3fbi?ocid=BingNewsSerp.
2. Goldstein, Steve. “There Are New Fears about Fed Firings after FTC Dismissals. What Analysts Are Saying.” MarketWatch, March 19, 2025, sec. Markets, Need to Know. https://www.marketwatch.com/story/trump-and-the-fed-are-getting-along-but-now-there-are-new-fears-about-firings-0024f7b9.
3. Pisani, Joseph. “Stock Market Today: Dow Drifts Lower; Global Markets Gain.” Wall Street Journal Live Updates - April 15, 2025, April 15, 2025. https://www.wsj.com/livecoverage/stock-market-trump-tariffs-trade-war-04-15-25/card/bessent-thinks-about-next-federal-reserve-chair-all-the-time--mrO9ze5OobYJhFcNuu4p.
4. Trump, Donald. “Social Media Post.” Truth Social, April 17, 2025. https://truthsocial.com/@realDonaldTrump/posts/114352766082542122.
5. Board of Governors of the Federal Reserve System. “About the FOMC.” Federal Open Market Committee (blog), n.d. https://www.federalreserve.gov/monetarypolicy/fomc.htm.
6. Federal Reserve Bank of St. Louis. “The FOMC Voting Rotation, Explained.” Blog. Open Vault Blog, November 16, 2022. https://www.stlouisfed.org/open-vault/2022/nov/fomc-voting-rotation-explained.
7. The Board of Governors of the Federal Reserve System - About the Fed - Federal Research Act. Section 2. The Federal Reserve Districts. “The Federal Reserve Act,” n.d. https://www.federalreserve.gov/aboutthefed/section2.htm.
8. “Who Owns the Federal Reserve?” FAQs, n.d. https://www.federalreserve.gov/faqs/about_14986.htm.
9. “Overview: Federal Reserve System Boards of Directors.” About the Fed - Federal Reserve Banks, n.d. https://www.federalreserve.gov/aboutthefed/directors/about.htm.
10. Board of Governors of the Federal Reserve System. “Board Members.” About the Fed, n.d. https://www.federalreserve.gov/aboutthefed/bios/board/default.htm.
11. Wessel, David. “Who Has to Leave the Federal Reserve Next?” Brookings Commentary, March 17, 2025. https://www.brookings.edu/articles/who-has-to-leave-the-federal-reserve-next-2/.
12. Op. cit
13. Messerly, Megan, and Victoria Guida. “Bessent Privately Urges Caution as Trump Attacks Powell.” Politico, April 17, 2025. https://www.politico.com/news/2025/04/17/trump-powell-fired-fed-00295552.
14. Timiraos, Nick. “Can Trump Fire Fed Chair Jerome Powell?” Wall Street Journal, April 17, 2025, Markets Coverage (Live Blog). https://www.wsj.com/livecoverage/stock-market-trump-tariffs-trade-war-04-17-25/card/can-trump-fire-powell--JXhx7p7R8Qdi2E1X0pmF.
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