Trump and allies plan to overhaul the Fed

President Trump appointed Jerome Powell as chairman of the Federal Reserve (Fed chair) on February 5, 2018, but it did not take long before he became critical of him. Last year, when asked about his plans for the Fed if he were to win a second term as President of the United States, Trump made clear that he would not reappoint Powell as Chair. This would mean that we are going to see a new Fed chair after May 23, 2026. In March, a shortlist of prime candidates was leaked. In April, another leak revealed a plan for the Fed that goes much further than this. This plan includes the premature removal of Powell and a new job description for the next Fed chair.

In this special report, we first address the plans to get rid of Powell, followed by the plans for the new role for the Fed chair. Then we discuss the internal and external candidates for the position. The premature appointment of a new Fed chair would require a Republican majority in the Senate. We discuss what the role of Congress could be in either reducing or preserving the Fed’s independence. Financial market reactions could also play a role. We conclude with the implications for monetary policy, the yield curve, and inflation if these plans were to succeed.

Jerome Powell is now in his second term as Fed chair. His first four-year term started on February 5, 2018, nominated by President Trump. He was reappointed by President Biden for a second four-year term on May 23, 2022. Trump has since made it clear that, if he were to be re-elected, he would not reappoint Powell for a third term as Chair. However, according to a plan leaked in April, Powell should be ousted as Fed chair before his term ends in 2026. The question is whether the US President has the power to remove him prematurely. The Trump allies who drafted the plan seem to think that this is within his power. Since the presidential inauguration is on January 20, 2025, and Powell’s second term expires on May 23, 2026, this would mean that Trump could cut short Powell’s term as Chair by about 16 months.

At the same time, the plan would likely leave Powell on the Fed’s Board of Governors. Powell has been on the Board since May 25, 2012, filling an unexpired term. He was reappointed to the Board on June 16, 2014, for a full term ending on January 31, 2028. So even if Trump manages to depose him as Chair, he might still serve as an “ordinary” Governor and permanent Federal Open Market Committee (FOMC) voter through early 2028. However, his role in the FOMC would be considerably diminished. Although endowed with only one vote, in practice a Chair plays an important role in reaching consensus in the FOMC.

Note that the law states that the US President can remove a Fed governor “for cause.” More specifically, according to the Federal Reserve Act, Section 10 (Board of Governors of the Federal Reserve System), paragraph 2: “…each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”

Courts have historically interpreted “for cause” as inefficiency, neglect of duty, or malfeasance in office. A disagreement on monetary policy is not likely to qualify as cause. If Trump tries to remove Powell from his position as Fed chair, Powell could start a lawsuit and the Supreme Court – which has a 6-3 Republican majority, three of whom appointed by Trump – would have to decide. When Trump contemplated removing Powell from office in 2019, Powell said, “I will never, ever, ever leave this job voluntarily until my term ends under any circumstances. None whatsoever. It doesn’t occur to me in the slightest that there would be any situation in which I would not complete my term other than dying.”

In the meantime, the vice chair of the Board, Philip Jefferson, would take over. However, since Jefferson is a Democrat, Trump would likely take action to nominate a new Chair as soon as possible. He could opt for internal or external candidates.

If the plan is to depose Powell as Fed chair, but keep him on as a Fed Governor, then Trump would initially have to select a new Chair from the current Board of Governors, as there is no vacancy at the moment. This means that until January 31, 2026, when Adriana Kugler’s term expires, Trump would have to nominate one of the current governors as new Fed chair if he manages to remove Powell from this position. This would leave Christopher Waller and Michelle Bowman as the two Republican candidates.

However, if a current governor resigns prematurely, Trump could insert an external candidate. Of course, one of the Republican governors (Waller or Bowman) could be persuaded to step down in exchange for a position in the Trump administration or elsewhere. This would clear the way for Trump’s preferred Fed chair from the outside. Although Waller and Bowman are Republicans, it is not clear whether they would be willing to do Trump’s bidding in the FOMC. Therefore, it is more likely that he will opt for an external candidate. But then Waller or Bowman should be willing to step aside, assuming all Democrats decide to stay on (the) board. This gives Waller and Bowman some bargaining power in either getting the Chair position or a top job in the Trump administration.

A Republican majority in the Senate is crucial to any plan to appoint a new Fed chair. The members of the Board of Governors are nominated by the President of the United States and confirmed by the Senate. The Chair of the Board is nominated by the President from among the members and is also confirmed by the Senate. Currently, the Democrats have a 51-49 majority in the Senate (including three Independents). For confirmation of the Fed chair, 51 votes are needed. The House of Representatives, which is already majority Republican, cannot help the President in this regard. It could only play a role in revising the Federal Reserve Act.

So if Powell is replaced, either prematurely or at the end of his second term as Chair, who are the external candidates? TheWall Street Journal reported in March that two of Trump’s advisors, Steve Moore and Arthur Laffer, have come up with a shortlist of three candidates: Kevin Warsh, Kevin Hassett, and Arthur Laffer himself… Reportedly, Trump did not commit to any candidate and is expected to cast a wide net. In fact, other Trump allies are also likely to come up with recommendations. However, Kevin Warsh was also on the final shortlist for Fed chair in 2017-2018, when Powell was ultimately nominated by Trump. Kevin Hassett was the Chairman of the Council of Economic Advisers during the (first) Trump administration. Arthur Laffer, inventor of the Laffer Curve, was an economic adviser to Ronald Reagan, and consequently a champion of Trump’s 2017 tax cuts. Trump awarded him the Presidential Medal of Freedom in 2019. It should be noted that Laffer is now 83, Kevin Warsh is 54, and Kevin Hassett is 62. Therefore, there is a decent chance that the next Fed chair will be called Kevin.

More far-reaching than removing Powell from office prematurely is the plan to give the US President a role in monetary policy making. According to the plan leaked in April, the new Chair would regularly seek Trump’s views on interest rate policy and then negotiate with the FOMC to steer policy on the president’s behalf. This would be a radical change from the current practice, in which the US President is not involved in monetary policy and is even expected not to comment on the decisions made by the FOMC. Political influence is limited to the Fed chair’s semi-annual monetary policy report to Congress (more specifically the Senate Banking Committee and the House Financial Services Committee) and the appointments to the Fed Board and of specific functions such as the Chair position by the Senate. Of course, attempts have been made to influence the FOMC. The most notorious and successful case was President Nixon pressuring Fed chair Arthur Burns to provide monetary stimulus before the 1972 elections. Burns succumbed to the pressure and has become an example of what we would not like to see in a Fed chair. Since Paul Volcker’s term from 1979 to 1987, the Fed has taken a more independent stance. However, this does not mean that politicians have stopped trying to influence monetary policy. In a White House meeting in 1984 with President Reagan and his Chief of Staff James Baker, the latter told Fed chair Paul Volcker, “The president is ordering you not to raise interest rates before the election.”

More recently, during his first term in office, and in the same year that he nominated Powell, Trump complained, “To me, the Fed is the biggest risk (to the economy), because I think interest rates are being raised too quickly.” Biden has also crossed the line. For example, on Wednesday April 10, 2024, in response to higher than expected CPI inflation data that destroyed the Fed’s plans to start cutting rates in June, Biden said, “Well, I do stand by my prediction that, before the year is out, there’ll be a rate cut.” However, the plan recently developed by Trump allies is to essentially insert the US President into the FOMC decision-making process. Arranging this through legal means seems a bridge too far, but according to the Wall Street Journal, “Some of the former president’s advisers have discussed requiring that candidates for Fed chair privately agree to consult informally with Trump on the central bank’s decisions.” In other words, Trump would have to find a candidate who is willing to be the next Arthur Burns.

The US Congress plays a crucial role in either defending the Fed or reducing its independence. The plans of Trump’s allies would require at least a majority in the Senate. At present, the Democrats (including three Independents) have a 51-49 majority, but this could change in the November elections. However, not all Republican senators may support an attempt by Trump to remove Powell prematurely and insert himself into the monetary decision-making process. To calm the markets, it would be helpful if a sufficient number of Republicans went on record saying that they would not consider a nomination for Chair of the Board before Powell’s term ends. Since confirmation of a Fed chair requires a simple majority, preventing an attempt to depose Powell would likely require only a few Republican senators.

Although the House of Representatives has no role in Fed appointments, any change to the Federal Reserve Act requires approval in both chambers of Congress. This works both ways. If Trump wants to change the Federal Reserve Act to get a better grip on the central bank, he needs Republican majorities in both houses. And even then, he may not get enough support from his own party. Meanwhile, if there are sufficient majorities supporting the independence of the Fed, the Federal Reserve Act could be altered to build in extra protection for the Fed chair or the entire Board. However, this would require a veto-proof majority, i.e. two-thirds of the Senate and two-thirds of the House of Representatives.

Financial markets could also play a role in preventing an assault on the Fed’s independence. Any threat to the Fed’s independence is likely to push up longer-term interest rates due to higher inflation expectations. This could effectively wipe out the short-term economic gain that Trump would have in mind by lowering policy rates. Higher longer-term rates would slow down the economy rather than giving the boost that lower policy rates should provide. It would also make it more expensive for the federal government to borrow, unless the Treasury would shift to issuing predominantly Treasury bills instead of notes and bonds.

In our baseline forecasts, we already have a Trump victory and a universal tariff that will lead to a rebound in inflation in 2025 and pause the Fed’s cutting cycle. Trump may not have decided yet whether to embrace the Fed plans prepared by his allies, and it remains to be seen how much support he would get from the Republican Party and subsequently the courts. However, if Trump succeeds in reducing the Fed’s independence, this would clearly be inflationary, and not only because of historical experience. Trump has repeatedly made it clear that he loves rate cuts and low rates. This could mean that the FOMC would cut rates despite rising inflation from a universal tariff, which would actually reinforce the inflationary impact of a universal tariff. Stripping the Fed of its monetary policy independence by a second Trump administration would, ceteris paribus, through low policy rates, push up inflation and quickly steepen the yield curve in 2025 and beyond.