(Bloomberg Businessweek) -- Central bank independence is emerging as a 2024 campaign issue, as both supporters and opponents of former President Donald Trump increasingly question whether he would, if reelected, seek to reduce the autonomy of the Federal Reserve.
Neither Trump nor his campaign has taken an official stand on that, although the Republican candidate has said he wouldn’t reappoint Fed Chair Jerome Powell, whom he had discussed firing in 2018. Some informal Trump advisers have floated ideas about possible changes to the Fed that would give him more power over the central bank.
That’s convinced many people that Trump would take action on the subject in a second term—44% of respondents in a survey of Bloomberg readers in late May said they expected him to weaken the Fed’s independence or limit its power. By contrast, only 5% said that President Joe Biden would go beyond comments on monetary policy or calls for lower interest rates if reelected.
What a President Can and Can’t Do to the Fed
Appointing Fed OfficialsThe President’s most direct power over the Fed is through naming appointees to fill vacancies on the Board of Governors and appointing them to key positions, including chair, on that body. Governors fill 14-year terms and Fed chairs serve four-year terms. All sit on the Federal Open Market Committee, or FOMC, the policymaking group that sets interest rates.
Powell succeeded Janet Yellen, now Treasury Secretary, in 2018. In appointing him, Trump broke from recent historical precedent in which new presidents reappoint the chair chosen by their predecessor. Biden reappointed Powell in 2021.
Powell’s term as chair expires in 2026. If he is reappointed and continues on for a new four-year term as chair, his term as governor would then be up in 2028. At that time, he would have completed a full term as a governor and so, per the law, will be ineligible to be reappointed for another one. However, the Federal Reserve Act says “upon the expiration of their terms of office, members of the board shall continue to serve until their successors are appointed,” so Powell could potentially remain on the board if the president holds the slot for his expired governor term open.
Including Powell’s expiring governor term, the next president will have two scheduled opportunities to name appointees to the Fed board, in 2026 and 2028. But that represents a relatively small slice of the 12-member FOMC, which is made up of all the Fed governors and a rotation of officers from the 12 regional Federal Reserve banks. The regional presidents are selected not by the president, but by directors of the individual banks, subject to the approval of the Fed’s Board of Governors.
Additionally, a president’s appointees to Fed governor, chair and vice-chair positions must receive Senate confirmation, a process that serves as a check on the selections. Stiff opposition from Senate Republicans led Biden’s initial pick for vice chair for supervision, Sarah Bloom Raskin, to withdraw from the nomination process in 2022. Pushback from lawmakers also doomed some of Trump’s Fed picks.
Removing the Fed ChairThe most direct way of sending a message to the Fed would be to remove its chair, as Trump discussed doing in 2018 when he was angry with Powell over a series of interest rate hikes. But a president can’t do that easily, or perhaps at all, legal scholars say.
Section 10 of the Federal Reserve Act says members of the Board of Governors, of which the chair is one, can be “removed for cause by the president.” Legal scholars have generally interpreted “cause” to mean serious misconduct or abuse of power.
But whether a president can remove the chair is more ambiguous, because the law doesn’t explicitly provide the “for cause” protection for the role, said Peter Conti-Brown, a professor and Fed historian at the Wharton School of the University of Pennsylvania. Regardless, because of the “for cause” protections for governors, stripping a Fed chair of that title might mean the individual could remain on the board. It also might not remove such an individual from another powerful perch: head of the rate-setting FOMC. Its members, not the president, choose who leads it.
Rewriting the Federal Reserve ActA longer-term project to reshape the Fed would involve amending the law that created it, which would require an act of Congress. The Heritage Foundation, a conservative think tank, included several such recommendations in a document that is part of its Project 2025, which aims to set a policy agenda for the next president. It calls for changes that would put more constraints around how the Fed sets monetary policy and regulates the largest US banks. For example, it suggests the Fed’s dual mandate — bestowed upon it by Congress — of fostering both stable prices and maximum employment should be changed to focus only on inflation.
Pressure for changes at the Fed have also come from other quarters. For example, after ethics scandals at the Fed in recent years, lawmakers on both sides of the aisle have pushed for more transparency across the central bank’s system, including at the regional banks. Environmental and consumer-advocacy groups have also lobbied for the Fed to do more to combat the risks climate change poses to the financial system. The Fed Up campaign at the Center for Popular Democracy has advocated for the Fed to prioritize the employment side of its dual mandate, arguing that interest-rate hikes can hurt vulnerable workers.
Pressure campaignsPresidents of both parties have tried to influence the Fed by applying pressure both publicly and privately. Historically, presidents have aired complaints in person, perhaps even with some physical intimidation—Lyndon Johnson summoned Fed Chairman William McChesney Martin Jr. to his Texas ranch in 1965 to berate him for raising borrowing costs. President Richard Nixon in the 1970s famously applied pressure on then-Fed Chair Arthur Burns, which some economists believe led the central bank to refrain from taking forceful steps to rein in inflation at the time. As president, Trump publicly lambasted 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 will cut rates and reiterating that assertion in April, but largely refraining from speaking publicly about the central bank’s policy. Meanwhile, Democratic members of Congress have spoken out more directly. Senator Elizabeth Warren of Massachusetts, for instance, reacted to news that the European Central Bank had cut interest rates by posting on X that “Jerome Powell needs to get with the program.”
Powell has repeatedly emphasized that the Fed aims to be apolitical and consider only what’s best for the economy as it sets policy. When asked at an event in May about the Fed’s independence in relation to the executive branch, Powell said “without question.” He also said lawmakers on both sides of the aisle support the central bank’s independence.
But the Fed is widely understood to operate in a political context. Fed leaders work closely with the Treasury Department, and spend time networking with Capitol Hill lawmakers. The Fed’s decisions have to take into account the economic impact of decisions by both the president and Congress, such as tax cuts or large spending plans.
Conti-Brown, the Fed historian, said the central bank’s financial regulation decisions can sometimes factor in feedback from various political factions. “The Federal Reserve is a deeply political institution,” Conti-Brown said. But “politics and partisanship are quite different.”
Why Central Banks Want Independence
In general, politicians like lower interest rates because making money cheaper helps people buy more things right now, boosting economic growth. To supporters of modern central banks, independence from political pressure is what lets banks take necessary but sometimes unpopular steps, like 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 believe that the central bank will do whatever is needed without fear of political consequences.
In May, the White House Council of Economic Advisers published a blog post emphasizing the Biden administration’s “unwavering support” for central-bank independence, citing research and history to make the case that banks are better able to control inflation if they have the kind of public credibility that independence brings.
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