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.
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.
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.
As if parsing text that different generations of lawmakers edited decades apart was not tricky enough, the question focuses on what to make of the fact that the 1977 sentence about designating a chair does not contain the “for cause” removal phrase. Because no president has tried to fire a Fed chair who was unwilling to resign, there is no precedent to serve a guidepost for whether the protection from arbitrary firing extends to the role of board chair.
If Mr. Trump did demote Mr. Powell and the latter filed a lawsuit challenging whether it was lawful to strip him of his chairmanship, the outcome could turn on the philosophy that a judge brings to the question of how to interpret statutes, said Peter Conti-Brown, a legal studies and business ethics professor at the University of Pennsylvania’s Wharton School and the author of the book “The Power and Independence of the Federal Reserve.” A judge who analyzes the dispute based on the text alone would most likely rule that Mr. Trump could demote Mr. Powell, while a judge who thinks the statute should be analyzed in light of Congress’s intent of structuring the Fed to be able to resist political pressure could rule the other way.
Does it matter which governor serves as the Fed chair?
Not on paper. The Fed chair wields no more voting power than the other six governors as the head of the central bank’s board. But the chair does have outsize influence on the financial markets, which parse and react to every utterance that person makes.
Even if Mr. Trump were to demote Mr. Powell, the president might not succeed in removing him from his parallel position as the chairman of the central bank component that sets interest rates and controls the money supply. That group, known as the Federal Open Market Committee, has 12 voting members: the seven Fed governors and five of the 12 presidents of the regional Fed banks. By tradition, the committee has selected whoever is serving as Fed chair to be its chair, too — but in theory, it could choose to keep Mr. Powell as its chairman regardless of Mr. Trump’s demotion, in a show of resistance to political interference.
Nevertheless, Mr. Trump could see a high-profile and unprecedented demotion of Mr. Powell as a politically advantageous symbolic step, since it would help him try to persuade any voters who are experiencing economic problems not to blame him.
What could Congress do about it?
Mr. Conti-Brown said Congress had two options for trying to block Mr. Trump from removing Mr. Powell as the chairman.
The first, less effective option, he said, would be for the Senate to tell Mr. Trump that it would refuse to confirm any nominee to be the replacement chair before the election. To prevail, it would take 51 votes — meaning at least four Republicans would have to defy the president, assuming every Democrat would be willing to do so.
The second, better option, he said, would be for Congress to enact legislation adjusting the text of the Federal Reserve law so that it clearly and explicitly protects the chair from being removed without good cause. Since it would take two-thirds of both chambers to override Mr. Trump’s likely veto of such a bill, this would require many more Republicans to be wiling to break with the president.
“President Trump is playing a dangerous game. It is not in anyone’s interest to do what he’s thinking of doing — including his own,” Mr. Conti-Brown said, adding: “History has proven time and again that when we give politicians the power to set the value of money, they do it badly and the consequences can be catastrophic.”