Donald Trump could return to an outdated Federal Reserve model

Former President Donald Trump recently repeated his view that the president should have a greater role in the Federal Reserve’s monetary policy decisions, a signal he could seek to remake the central bank should he win a second term in the November election.

“I feel that the president should have at least [a] say in there” on Fed decisions, Trump said at a news conference on August 8, 2024, adding, “I feel that strongly.”

If elected, Trump would have several options for Fed remodeling, all of which would diminish the political independence that has served the country well in recent decades.

Trump didn’t specify how he would try to alter the Fed, but he evidently might prefer something like the central bank’s original design, which gave the president substantial sway over its policymaking. Under that system, the Treasury secretary and the comptroller of the currency—both of whom are nominated by the president—served as Federal Reserve Board members, and both could be fired by the president at will.

The Banking Act of 1935 changed all that. It removed the secretary and comptroller from the Board. It gave the seven members of the newly constituted Board 14-year terms, staggered so that one expired every two years, reducing the chances that an individual president would be able to fill many of the seats. Board members could be fired only “for cause,” a legal standard generally understood to mean that mere policy disagreements would not justify removing them.

The Fed’s modern structure, together with the norms and understandings that have taken hold in the past quarter century or so, have worked well overall. Granted, we’re just emerging from the worst bout of inflation in 40 years. But even so, the Fed’s track record demonstrates that an independent central bank delivers better economic performance, on average, than one dominated by elected politicians.

Trump’s options for gaining control

If Trump wins reelection and chooses to operate under current laws and norms, he will have only limited options for bending the Fed to his will.

Trump will be able to exercise the traditional power of nominating Board members, subject to Senate confirmation. But the first vacancy in what would be his second term isn’t scheduled to occur until January 2026, when Adriana Kugler’s term as a Fed governor expires. Fed chair Jerome Powell’s separate appointment as Board chair won’t expire until May of that year.

Trump could pick his own person to succeed Kugler on the Board and then promote that person to succeed Powell as chair. But that process wouldn’t be completed until 16 months into the new presidential term. Trump may not have the patience for that.

Alternatively, he could defy current norms and understandings of the law with a range of more aggressive possible approaches, which are detailed in an earlier blog post. Briefly, on day one of his second term, Trump could attempt to demote Powell from the chair’s position. Whether a president has the power to demote a chair has never been litigated, so the action surely would end up before the Supreme Court. Even if Trump prevailed, he’d likely be limited to naming a successor from among the current Board members. An even more aggressive move would be to blow up the entire institutional foundation of the Fed by embracing a legal theory that has gained traction in recent decades among some conservative legal scholars. According to this theory, known as the unitary executive theory, independent agencies like the Fed are unconstitutional because Article II of the Constitution opens by stating that “The executive Power shall be vested in a President of the United States of America.” There’s no mention of independent agencies. All decision making power currently exercised by the Fed would accrue to the president.

Such a move would likewise surely end up before the Supreme Court, a process that could take months if not years. The ensuing uncertainty could be devastating for the US and global financial systems. No one would know for sure whether Fed actions to quell the market turmoil would ultimately be overturned by some new institutional structure. In central banking, credibility is key, and the Fed would be stripped of it.

Alternatively, Trump could ask Congress to give the president the more direct control over rate setting, as he seems to want. For example, he could demand legislation requiring that every Fed monetary policy action be subject to presidential approval. A somewhat similar requirement was introduced after the Global Financial Crisis, requiring the Fed to seek Treasury approval before invoking its so-called 13(3) powers, named for the section of its charter that allows it to create certain types of emergency financial assistance programs.

The requirement for a 60-vote majority in the Senate to pass such a bill would probably doom the effort to the failure it deserves.

It Ain’t Broke

US and other countries’ experiences are replete with examples of how political control of the central bank generates worse economic outcomes. Among them is the US case of President Richard Nixon pressuring the Fed to keep monetary policy loose, which it did, contributing to the painfully high inflation of the 1970s. We don’t need to run this experiment again.