Manipulating the Federal Reserve? The US President has limited options!

As the probability of Trump's re-election continues to rise, the tense relationship between him and Federal Reserve Chairman Powell has once again attracted market attention.

Earlier this month, some loyal Trump supporters claimed that if Trump returns to the White House, Powell will quickly lose his job. In response, Powell clearly stated his plan to complete his term as Federal Reserve Chairman. Later, Trump also stated that he will not dismiss Chairman Powell prematurely, and urged the Fed to avoid cutting interest rates before the November election.

However, at the same time, as the trend of cooling inflation becomes more significant, fears of an economic "hard landing" under high interest rates are escalating. Powell, New York Fed President Williams, and other officials have previously leaned dovish, and the market is increasing its bets on a 25 basis point rate cut in September.

Based on the current term calculation, if Trump wins the election and becomes the President of the United States, he will have the opportunity to choose the next Federal Reserve Chairman. Trump has already stated that he will not reappoint Powell.

So, the question arises, does the U.S. President have the power to decide the fate of the Federal Reserve Chairman? And how does it affect the Fed's monetary policy decisions?

A report released this week by UBS analyst Jonathan Pingle explains in detail the influence of the U.S. President on the Federal Reserve and the Fed's high degree of independence in monetary policy.

The President can influence the Fed through appointments, but the Fed is independent of politics

First of all, it can be confirmed that the U.S. President has the right to nominate candidates for Federal Reserve Chairman, but the final decision on the appointment lies with the Senate.

Currently, the U.S. Congress is divided between two parties, with the House controlled by the Republicans and the Senate controlled by the Democrats. With Biden dropping out and Vice President Harris entering the race, the possibility of continued division in the U.S. Congress is increasing. By then, if the Democrats continue to control the Senate, Trump's appointment of his preferred candidate may face obstacles.

According to the U.S. Constitution and laws, the appointment of the Federal Reserve Chairman mainly includes the following steps:

The U.S. President nominates the Chairman of the Federal Reserve Board of Governors → The candidate participates in a public hearing held by the Senate Banking, Housing, and Urban Affairs Committee → The Senate votes to approve the nomination, and the candidate is confirmed as the Chairman of the Federal Reserve Board of Governors.

Although appointed by the President, the Federal Reserve Chairman is legally protected during their term and can independently carry out their duties without political pressure.

Based on the principle of "good cause removal," the President cannot dismiss the Federal Reserve Chairman solely due to policy disagreements, unless there are serious reasons such as "neglect of duty, negligence, or malfeasance." This principle ensures the independence of the Fed in formulating monetary policy.

If the President insists on removing the Federal Reserve Chairman, a clear ruling from the court may be required.

The President can also influence monetary policy by nominating the seven members of the Federal Reserve Board, whose nominations also require Senate confirmation, and the process of replacing members is intentionally designed to be slow. It is worth noting that, although the President of the United States has the right to nominate the Chairman of the Board, he cannot nominate the Chairman of the Federal Open Market Committee (FOMC), as this position is elected internally by the FOMC. The FOMC consists of seven board members and five regional Federal Reserve Bank presidents, who are responsible for setting the federal funds rate target.

This further enhances the independence of the Federal Reserve in formulating monetary policy, as even if the President can replace the Chairman of the Board, it does not necessarily change the policy direction of the FOMC. Powell currently serves as both the Chairman of the Federal Reserve Board and the FOMC.

In addition, the independence of the Federal Reserve is also reflected in the fact that the 12 regional Federal Reserve Banks are independently chartered, with their board members elected by their respective member banks, who then select the president of the regional Federal Reserve Bank, subject to approval by the Board of Governors.

Influencing the Federal Reserve through Legislation

The Federal Reserve is overseen by Congress and is accountable to the public and Congress, not the President.

According to a UBS research report, the Federal Reserve has only been truly independent since 1951, and its legal mandate (maximizing employment and price stability) was not clearly defined until the Federal Reserve Reform Act of 1977.

Therefore, in addition to personnel appointments, the President can also adjust the powers and responsibilities of the Federal Reserve through legislation passed by Congress, further influencing the policy direction of the Federal Reserve.

For example, the Federal Reserve Reform Act of 1977 and the Dodd-Frank Act of 2010 both imposed restrictions and adjustments on the powers of the Federal Reserve.

Historical Disagreements are not Uncommon

Although the Chairman of the Federal Reserve is nominated and appointed by the President, historical disagreements between the two are not uncommon.

Taking Powell as an example, Powell was selected as the Chairman of the Federal Reserve during Trump's term, but the two had significant differences in monetary policy. Trump heavily criticized Powell's interest rate hike policy and discussed removing him from office.

Going further back, President Nixon attempted to influence Burns to lower interest rates, and there were conflicts between President Truman and Marriner Eccles.

While the President can exert some influence on the Federal Reserve through nominations and legislation, the decision-making process and policy formulation of the Federal Reserve still maintain a high degree of independence. Historically, even Federal Reserve Chairmen under pressure from the President, such as Burns, did not fully comply with the President's wishes