In Focus delivers deeper coverage of the political, cultural, and ideological issues shaping America. Published daily by senior writers and experts, these in-depth pieces go beyond the headlines to give readers the full picture. You can find our full list of In Focus pieces here.
Recent actions by President Donald Trump have called into question the historic independence of the Federal Reserve, raising fears that a precedent could be set for monetary policy to be influenced by the demands of short-term politics.
Recommended Stories
- Bessent 'confident' Supreme Court rules in favor of Trump tariffs
- First round of September Social Security payments issue in three days
- Economy added just 22,000 jobs in August: The key facts and figures
For months, Trump has been agitating for the Fed to cut interest rates, a pressure campaign that violates the tradition that the White House refrains from commenting on monetary policy and instead leaves it to the central bank. Just a few months ago, Fed officials were in lockstep with one another, voting to hold rates steady, but now the central bank is poised to cut rates at its next meeting.
Dennis Lockhart, former president of the Federal Reserve Bank of Atlanta, told the Washington Examiner that politicians have practiced Fed independence for decades and that Trump’s attacks against Powell and the Fed are “unprecedented.”
The backdrop
Trump has frequently pressured Fed Chairman Jerome Powell to lower interest rates. However, by design, the Federal Reserve System ensures that the chairman does not have total control over monetary policy decisions. Instead, monetary policy is conducted by a 12-person board called the Federal Open Market Committee, comprising the seven members of the Board of Governors in Washington, D.C. (of which only six are currently in office), the president of the Federal Reserve Bank of New York, and a rotation of four of the heads of the other 11 regional Fed banks.
The committee generally likes to have unanimity on interest rate decisions. But, at the last meeting, two Fed governors, Michelle Bowman, and Christopher Waller, voted against the decision to hold rates steady and instead said they wanted to cut rates. That marked the first time that two governors dissented since 1993.
The Trump administration, especially Federal Housing Finance Agency Director Bill Pulte, has also attacked the Fed under Powell for cost overruns in remodeling the central bank’s headquarters. Pulte has also accused Fed governor Lisa Cook of mortgage fraud, prompting Trump to attempt to fire her and for the Justice Department to open an investigation into the allegations.
Trump’s opponents say that the accusations are a pretext to fire a monetary policy committee member and put in a replacement who is more amenable to cutting interest rates and supporting the president’s goals.
Either way, the Fed’s makeup improved for Trump and his allies when Gov. Adriana Kugler suddenly and unexpectedly resigned. Kugler had been voting to hold rates steady, and her departure handed Trump the ability to tap a replacement who would share his vision of slashing interest rates.
Trump nominated Stephen Miran, the chairman of the White House Council of Economic Advisers, to fill Kugler’s seat, and Miran vowed during his confirmation hearing this week to uphold the Fed’s independence — even though some Democrats don’t think that is true.
“If confirmed, I plan to dutifully carry out my role pursuant to the mandates assigned by Congress,” Miran told lawmakers. “My opinions and decisions will be based on my analysis of the macro economy and what’s best for its long-term stewardship.”
MARKETS HAVE ‘WAIT-AND-SEE’ REACTION TO TRUMP ATTEMPT TO FIRE FED GOVERNOR
Furthermore, Miran also told the lawmakers that he would not resign from his current role at the CEA if he were confirmed to the central bank, but would rather go on leave. Democrats contend that such an arrangement means that, if confirmed, Miran would not be independent of the Trump administration.
The Fed’s independence
The Constitution gives Congress, not the president, the power to “coin Money” and “regulate the Value thereof.” In 1913, Congress passed the Federal Reserve Act to establish the Federal Reserve. Subsequent legislation gave the Fed more power, and a 1951 agreement with the Treasury regarding managing the federal debt is generally seen as giving the Fed the independence to conduct monetary policy that it has today.
Several features of the Federal Reserve System are meant to prevent politics from influencing it. While the president nominates members of the Fed board and the Senate confirms them, governors serve 14-year staggered terms to insulate them from political turnover, and the chair, which leads the Fed, serves a four-year term that doesn’t necessarily align with the bounds of presidential terms.
“The officials of the Federal Reserve need to be essentially immunized from political pressure and political influence,” Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner.
Additionally, the central bank isn’t reliant on Congress for appropriations and rather finances itself through its own operations, providing another buffer and reason why many assert that the Fed is a uniquely independent agency.
Generally speaking, the economics profession sees central bank independence as important for preventing inflation. Economists have identified a number of instances in which political pressure to juice the economy in the short term led to monetary easing, and then higher inflation or even hyperinflation, as in the case of Zimbabwe.
Still, Lockhart pointed out that the Fed isn’t just an island with no oversight, as Congress still oversees it, but Congress generally does that oversight with a “fairly light touch.”
Hamrick emphasized that the president, currently, doesn’t have direct leverage over the Fed “and the only way that that would occur is if something were to change legislatively.”
Those features have given Fed officials relative autonomy over the years. Still, some experts say that the central bank has always been dependent on approval, if only tacit support, for its decisions from the executive, legislative, and even judicial branches.
Mark Spindel co-authored a book with Sarah Binder called The Myth of Independence: How Congress Governs the Federal Reserve. Spindel said that the history of the Fed is quite nuanced.
“The Fed has long relied on political support from Congress, from the president, from both parties, even sometimes from the courts to effectively deliver a monetary policy objective that is beyond the election cycle,” he told the Washington Examiner.
The broader picture and future
Right now, the Senate is considering Miran’s nomination, although he would presumably only serve until next year, when that Fed seat’s term is up. Cook’s status is also still up in the air. She has filed a lawsuit to remain on the board, a case that might make its way to the Supreme Court.
While the Supreme Court ruled earlier this year that the president generally has the power to remove independent agency members, the conservative majority stipulated in that case that Federal Reserve board members can only be fired for cause.
Gary Richardson, an economics professor at the University of California, Irvine, pointed out another counterbalance to the presidency’s power regarding the Fed: a president can’t just put anyone on the Fed board. That is because each nominee has to be approved by Congress.
“Even if Trump can fire people, he can’t appoint people to the Federal Reserve Board without the Senate’s confirmation,” Richardson told the Washington Examiner.
But some argue that Trump has already crossed a line with the attacks on Powell.
“In my view, a certain amount of damage has already been done,” Lockhart said, noting that because of the amount of pressure that Trump has put on Powell, any nominee that the president puts forward to replace him will likely face questions about whether that person made promises to Trump about how they will conduct monetary policy.
DOJ ISSUES SUBPOENAS IN FED GOVERNOR LISA COOK INVESTIGATION
Lockhart said that while Trump’s interventions have the capability to set a new precedent of intervening with the Fed, whether that sticks will largely depend on who occupies the Oval Office after Trump, because many people in the political realm understand the importance of keeping the Fed insulated from politics.
“At the same time, it’s much easier to mimic someone else’s behavior and point to that as setting a precedent that makes that behavior acceptable,” Lockhart said. “So we just don’t know who’s going to succeed Donald Trump, but it would be easier for anyone to point to Trump’s actions and just say this is continuous with past practices.”