How Trump Can Control the Fed

In Barron’s last Thursday, I (Benn) argued that a dusty legal anomaly could help president-elect Donald Trump—who has questioned the logic and legal basis of Fed independence—to wrest control of monetary policy away from the Federal Open Market Committee (FOMC).

The FOMC, composed of the seven Board of Governors members and five Reserve Bank presidents, has sole legal authority to conduct monetary policy.  But legislation gives the power to control interest on bank reserves—the primary tool by which the Fed implements monetary policy—solely to the Board of Governors.  As shown in the graphic above, all of the Board’s seven members are presidential appointments, whereas five of the twelve FOMC members are Reserve Bank presidents—not chosen by the White House.  In theory, as explained in the column, the FOMC could decide to raise rates while the Board, perhaps in deference to the president, could order them cut.

Here's where the president-elect comes in.

Though Trump cannot fire Jay Powell as chair of the FOMC, it is an open legal question as to whether he could fire him as chair of the Board.  Law scholars generally say “no,” but Powell would likely have to fight a firing on his own—as the Fed lacks standing to contest it.  If Trump were successfully to replace Powell as Board chair, we would effectively have two antagonist monetary “popes”—one chairing the FOMC, and the other chairing the Board.

Still, chairs are firsts-among-equals, and do not have any greater say, legally at least, than other Board or Committee members.  And Trump could not, in any case, fire Powell as a Board governor, except with “cause.”

Could Trump find valid “cause” to fire Powell—or indeed other Board members?  It is certainly possible. In the case of Democratic Board appointee Adriana Kugler, her term expires, in any case, at the end of January 2026, after which she will certainly be replaced by a Trump loyalist. Two other board members, Christopher Waller and Michelle Bowman, were appointed by Trump in his first term, and might, one could speculate, be induced thereby to do his bidding.  We think that unlikely, particularly in the case of the academically reared Waller, but we take note of the recent praise heaped on Bowman’s speech, connecting immigration with rising housing unaffordability, by vice-president elect JD Vance.  Other Board members, all Biden appointees—Michael Barr, Philip Jefferson, and Lisa Cook—could well be induced to pursue other opportunities before their terms expire, thus creating openings for Trump without the need for dismissals.

We have heard a wide range of views on the plausibility of a Trump takeover of monetary policy by way of the Board, as laid out in the Barron’s piece.  These range from “it’s terrifying” to “nah.” But in any case, draft legislation (in the form of Richard Shelby’s 2015 Financial Regulatory Improvement Act) already exists to eliminate the anomaly of Board control over interest-on-reserves. We would urge Congressfolk who believe in the importance of central-bank independence to act on it.