Pressuring the Fed to juice the economy as he seeks re-election, the president is toying with an unprecedented challenge to its independence.
President Trump has been attacking the Federal Reserve and its chairman, Jerome H. Powell, because he is angry that the central bank’s efforts to keep the economy healthy over the long term may dampen the stock market and economic growth in the short term just as he gears up for re-election.
The Fed’s powers include the ability to lower or raise interest rates and expand or contract the money supply. It uses these tools to add fuel when the economy is struggling and too many people are unemployed, and to slow activity down when the economy is overheating and prices are rising too quickly.
The Fed has raised rates nine times since 2015 — including four times last year, during the tenure of Mr. Powell, whom Mr. Trump nominated for the chairmanship.
Against that backdrop, Bloomberg News reported this week that the White House counsel, Pat Cipollone, had been researching whether Mr. Trump could remove Mr. Powell as the Fed chairman, demoting him to an ordinary member of the agency’s seven-member board of governors.
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Such a step would be yet another violation by Mr. Trump of norms that previous presidents of both parties exercised. It would also constitute an unprecedented challenge to the agency’s relative independence from politics.
Why did Congress give the Fed independence?
The idea is that the central bank should make decisions based on economic data with an eye toward serving the long-term interests of the country, rather than taking whatever action would be expedient in the near term for politicians facing re-election, according to Sarah A. Binder, a George Washington University political science professor who studies the Fed.
The Fed’s credibility as the guardian of the economy stems from public perception that it will make the right decision without regard to partisan politics — including raising interest rates even though that is unpopular in the short term, she noted. When it costs more to borrow, fewer people will buy homes and cars, and fewer businesses will invest or hire new employees. While such a decision may be good for the long-term economic health of the country, it is bad for incumbent politicians who want happy voters in a coming election.
“Lawmakers tied their hands behind their backs so politicians won’t be tempted to super-juice the economy before an election,” Ms. Binder said.
What protects the Fed’s autonomy?
Most senior government officials are subject to political control by Mr. Trump because he can fire them at will. But the Fed is one of several independent executive agencies that work differently. Congress wrote into the law that its governors, once confirmed by the Senate and appointed by the president, cannot be removed except “for cause,” like personal misconduct.
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Is the Fed chair also protected from arbitrary removal?
This is not clear.
In the statute, the phrase that forbids a president to fire the seven Fed governors without cause is attached to a sentence that sets their terms at 14 years. This sentence traces back to the original 1913 law that created the Fed, which was revised in a 1935 law. The next sentence, which Congress added in a 1977 law, says the president shall designate one of those governors to be the chair for a four-year term, subject to additional Senate approval.
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