The 2024 election matters for the Fed like no previous election

The fate of the Federal Reserve’s independence in setting monetary policy is likely to hinge on the November presidential election. President Joseph R. Biden Jr. has a track record of appointing Federal Reserve Board members with relevant expertise and a commitment to upholding the independent status of the Fed. In contrast, there are strong signs that former President Donald Trump could substantially remake the agency in a second term.

How might Trump do that? He could walk in through the front door, smash down the front door, or destroy the foundation of the institution altogether. Regardless of which method he chooses, higher inflation will probably result.

Walking in through the front door

A minimum of two slots on the Fed Board will open during the next presidential term. The president could use one to name a successor to Jerome Powell as Board chair and the other to name a vice chair. Additional appointments would become possible if other Board members leave before their terms as governor expire.

Trump made some excellent choices when he was president—including elevating Jerome Powell to the chair’s spot—but also some terrible ones. His nomination of Judy Shelton—a longtime advocate of reinstating the gold standard—failed by a whisker at the twilight of his term.

There will be limits on how much the next president can accomplish by exercising this traditional form of power. Among those limits: Powell’s four-year term as Board chair won’t expire until May 2026, so even if Trump wanted to hire a new chair, he’d have to wait 16 months into his second term if he respects the usual guardrails. But Trump may be motivated to go further.

Smashing down the front door

Whether the president has the power to demote the Board chair to regular governor has never been litigated, but Trump might be inclined to try. If the courts ruled in his favor, he could presumably also demote the two vice chairs before their four-year terms expire. By this means, he might be able to shape the top rung of Board leadership more to his liking more quickly.

Even so, there would still be limits on Trump’s power to control the agency. For one thing, if he demoted Powell before any governor seats opened, he’d have to appoint a new chair from among the incumbent governors. (Michelle Bowman and Christopher Waller would be the logical candidates.) Ditto for the two vice chairs.

For another thing, he still wouldn’t control monetary policy, partly because five members of the rate-setting committee—the Federal Open Market Committee—are Reserve Bank presidents, who are not presidentially appointed. So he could be motivated to go yet further.

Destroying the foundation of the institution

The Fed operates as an independent agency. Its monetary policy decisions are not subject to review by the president. But in recent decades, a new understanding of the power of the presidency—called the “unitary executive theory”—has gained traction in conservative legal circles.

Under this theory, Article II of the Constitution gives the executive power of the federal government uniquely to the president. Independent agencies like the Federal Reserve are deemed unconstitutional and would cease to exist as such. The president would have the power to decide monetary policy.

What it would mean for the US economy

The best-case scenario for a second Trump term would probably be a repeat of his mixed record in the first. Financial markets might even play a role in disciplining presidential decision-making. But serious adverse economic consequences would probably ensue from diminishing the Fed’s independence.

We know from our own history and from experience abroad what happens. For example, President Richard Nixon leaned on Arthur Burns, Fed chair at the time, to run a more accommodative monetary policy as Nixon was running for re-election in 1972. The unemployment rate duly edged down, but the legacy was a worsening of an already serious inflation problem. A pair of deep recessions were required to break the inflationary momentum Burns helped put in motion.

The more recent examples of political pressure on central banks come from abroad. In one of the more egregious modern cases, President Recep Tayyip Erdoğan of Turkey prevailed on his country’s central bank to cut its policy rate, even though inflation was soaring, on the hope that lower borrowing rates would encourage more capital investment and the greater productive capacity would bring prices down. As expected, the opposite unfolded. Inflation reached 85 percent, and Turkey is now struggling to bring it down.

The 2024 presidential election won’t be decided based on what-if scenarios about Fed independence and inflation. But we know American households hate inflation, and for good reason. We don’t have to go down this road. The risks are too great.