The White House’s relentless pressure on the Federal Reserve has kindled a debate on the central bank’s independence and role in the economy.
While President Donald Trump has backed off earlier suggestions that he would fire Fed Chairman Jerome Powell, he continues to demand lower interest rates.
The surprise announcement Friday that Governor Adriana Kugler will step down next week, well ahead of her expected departure in January when her term on the board of governors expires, gives Trump an early start on picking Powell’s replacement.
The president has already said he would nominate a new chair who would lower rates. That’s despite the continued resistance from Powell and most other policymakers to keep rates steady as Trump’s tariffs make their way through the economy and put upward pressure on inflation.
Amid the standoff between the White House and the Fed, Congress has the power to modify the central bank’s authority and mission.
Wharton finance professor Jeremy Siegel highlighted this potential last month, when he told CNBC that Powell may need to resign in order to preserve the Fed’s long-term independence.
His reasoning: if the economy stumbles, then Trump can point to Powell as the “perfect scapegoat” and ask Congress to give him more power over the Fed.
“That is a threat. Don’t forget, our Federal Reserve is not at all a part of our Constitution. It’s a creature of the U.S. Congress, created by the Federal Reserve Act 1913. All its powers devolve from Congress,” Siegel explained. “Congress has amended the Federal Reserve Act many times. It could do it again. It could give powers. It could take away powers.”
In fact, Siegel’s fears may be realized. The economy has flashed sudden warning signs, most notably Friday’s shocking jobs report that showed payroll gains were much weaker than previously thought.
Economists at JPMorgan even cautioned that the report flashes a recession alert as it suggests a sharp decline in labor demand from businesses.
Amending the Fed’s dual mandate
Congress’ leverage over the Fed is not lost on lawmakers. At an Axios event this past week, Sen. Bernie Moreno, R-Ohio, was asked if the Federal Reserve Act needs to be changed or updated.
“There’s a lot of things that we should talk about,” he replied. “For example, should the Federal Reserve be paying interest rates to banks for their overnight deposits? I think that’s a legitimate question that we need to examine a little bit more.”
In addition to paying U.S. banks interest on their reserves, he pointed out that the Fed pays foreign banks to hold money in America, adding “I don’t know that that’s a good plan. Maybe it needs to be lowered.”
Moreno also flagged the Fed’s dual mandate of full employment and price stability, which was established in 1977 when Congress amended the Federal Reserve Act.
He said Congress should take another look at the Fed’s mission, suggesting the mandate should be modified to target maximum employment “at the highest possible wage.”
As for the other piece of the dual mandate, Moreno also said “we need to make certain that we understand what they’re looking at when it comes to inflation.”
As an example, he noted Powell’s failure to hike rates sooner during the pandemic, when there was a supply shock and a spike in demand from all the stimulus. He also pointed to the Powell’s current reluctance to lower rates despite no indications yet that tariffs have caused a big spike in inflation and while taxes are coming down.
“So it’s, ‘how do you analyze this?’” Moreno explained. “And I think he’s looking at from a very political lens. He should be looking at from a very apolitical lens.”
For his part, he also told Axios earlier in the conversation that he “absolutely” believes in central bank independence but added that Powell could be legitimately fired for being “extraordinarily incompetent.”
Fed independence
Of course, the Fed isn’t completely devoid of any political influence. The president nominates and the Senate confirms members the board of governors, including the chair and vice chair. The Fed chair also must testify before Congress regularly and gets grilled by lawmakers.
At the same time, the Fed was structured to be somewhat insulated from political pressures. Governors have 14-year terms that expire on a staggered scheduled, preventing a single president from completely revamping the board all at once.
Governors also can’t be removed for policy disagreements and can only be ousted “for cause,” which has been interpreted to mean gross neglect of duty or malfeasance.
Regional Fed presidents are also not politically appointed, and the Fed funds its own operations without appropriations from lawmakers.
That’s why Fed independence is a tricky concept, Michael Pugliese, senior economist at Wells Fargo, told Fortune, as it largely derives from a mix of laws, norms, informal agreements and traditions.
“It’s not like there’s an independence clause,” he said. “It’s more that the structure itself is built a little bit independent of the political system.”
Pugliese thinks it’s highly unlikely Congress will amend the Federal Reserve Act to allow for more explicit influence from the White House.
That’s because Democrats wouldn’t go along with it, and Republicans probably wouldn’t get rid of the filibuster rule in the Senate to immediately erode the Fed’s independence, he said.
“Getting rid of the filibuster would probably open the door to tons and tons and tons of other policy discussions on a lot of different issues, not just the Federal Reserve Act.” Pugliese explained. “The filibuster has stuck around as long as it has because both parties have had reasons and cause to not change it. And maybe that changes one day, but I would be very surprised if the thing that changed it was the Fed.”
