Edward Lotterman
We as a country are more politically divided now than at any time since the Civil War. More so, I’d say, even than the turbulent Vietnam Era 1960s.
Because even then the foundations of our system were still generally accepted.
We are now eight months from a presidential election with two unpopular candidates, one of whom — along with many of his followers — openly question Constitutional norms and the objective rule of law.
And the platforms of both campaigns face monetary policy issues. Which leads us to discuss the influence and fate of the Federal Reserve.
Democrat Joe Biden is blamed for ongoing inflation in his first term but does not want a recession to combat inflation before or after the election. This delicate balance has been deftly handled by the Fed, at least so far.
Republican Donald Trump proposes to use executive power to impose 10% tariffs on all imports into our country — except for those from China that would face a 60% rate. If actually implemented, these tariffs would be the largest tax increase both in absolute and relative terms in the history of our country.
Taken alone, such tariffs would force the general price level higher — a fact conveniently ignored by Republicans who pin inflation on Biden’s policies.
Our central bank, the Federal Reserve, could moderate such price rises, but whether and how it does so might depend on the degree it is controlled by either the president or Congress. For now, this appears to be a moot point. The reality is that, to the extent its leaders are willing to stand to their guns, no one at either end of Pennsylvania Avenue can tell the Fed what to do. That is no guarantee of stable prices or stable output, but it does mean that, excluding the power to appoint, no politician can make key monetary decisions.
The U.S. central bank has a uniquely odd governance system that sprang from a series of events and political compromises that go back to when George Washington was president. The Fed is partly government, though not exactly a government institution, yet it also is not entirely private. The president does appoint members of a key seven-member Board of Governors. These must be confirmed by the Senate like Cabinet members or federal judges. They are subject to the same salary limits as Cabinet secretaries, members of Congress and Supreme Court justices. They serve 14-year terms that start in January of even numbered years.
But these governors do not have power to make monetary policy on their own. Moreover, politicians have no statutory power to fire the chair of the Board of Governors, currently Jerome Powell — and there actually is a historical case in which a Fed chair refused to step down at the direction of a president.
So whatever plans Trump aide Stephen Miller, who got into government as an aide to former Minnesota Rep. Michelle Bachman, or others have in planning a drastic Trump II Inauguration-afternoon restructuring the federal government decide, the Fed would be a hard nut to crack.
The 1913 Federal Reserve Act, with significant amendments in 1935, establishes the current governance.
So either Biden or Trump, elected in 2024 but inaugurated in January 2025, will not have even one appointee voting until January 2026. They will not get a second until January 2028, 10 months before the following presidential election. Since neither could serve a third term, that would end their influence on the board.
But couldn’t Trump simply fire the whole board the afternoon of his inauguration, or thereafter, and name their replacements? Such an act certainly would create a Constitutional crisis. President Ronald Reagan could fire all striking air traffic controllers despite their civil service status, because a statutory clause forbade their going on strike. But there is nothing in any statute that gives the president the power to remove Fed board members. Certainly, if Trump or Biden called for Powell or any other board member to step down, as Trump hinted during his term, they would be under tremendous pressure. But if they refused to do so, the president has no legal recourse.
Of course, couldn’t one simply send U.S. Marshals to physically remove the defiant governor from the premises and usher in a replacement, as U.S. agents walked Black students into Little Rock High School and Old Miss decades ago in defiance of states’ segregation laws? But that defiance of a structure created very deliberately 90 years ago would throw financial markets into a tizzy worldwide.
And even if the chair or other governors stepped down in the face of pressure from the Oval Office, the White House still would not be able to dictate interest rates or the money supply — even by proxy through loyal replacements.
That’s because these decisions are made by a Federal Open Market Committee that includes the presidents of five of the 12 district Federal Reserve banks serving in a rotation. These bank presidents are not government employees or appointees in any way. They are hired by the private corporations that these 12 banks legally are. They are chosen by boards of directors of these private businesses and usually are the conservative element on policy decisions.
If a U.S. president had convinced all of these governors to step down and had replaced them with flunkies, there would be a 7-5 majority that might do the president’s bidding. Again, such a revolutionary and reckless act to give a president control of monetary policy would throw global financial markets into turmoil.
And yes, if a president has filibuster-proof majorities in both houses of Congress, they could rescind the Federal Reserve Act entirely and create a new central bank to their liking, even one run out of a cubby hole in the West Wing. Even these most radical actions might happen at some very low level of probability.
Yet people should rest with some assurance.
When President Richard Nixon took office in January 1969, he called Fed Chair Willian McChesney Martin into the Oval Office and told him to resign because Nixon was naming Arthur Burns as a replacement. Martin responded that he had another year in his term as chair and was not going to resign. Burns did not take over until a year later and that is where our era of great inflation began. Nixon was angered, but knew it would roil financial markets and rile key Wall Street campaign donors if he started a public fight to fire a Fed chair. Whether Trump has such trust or awe of such institutional norms is an open question.
Powell — appointed chair by Trump, by the way — has a four-year term as chair that runs into 2026. He well might follow Martin in declining any order to resign that post.
Powell’s term as a member of the board runs into 2028. Because of resignations, five of the seven current governors are Biden nominees. One of the others, Christopher Waller, a Bemidji State grad who came out of the St. Louis Fed, is not likely to be a Trump lackey.
So a new president could seize control of monetary policy by a series of unprecedented extra-statutory acts or by having a rubber stamping Congress. Anything could happen. But citizens, voters and Wall Street do not want financial chaos that becomes economic chaos. Expect even the most reckless president to shy away from overthrowing the Fed.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
