Trump vs. the Fed: not an independent Fed?

Just recently ECB governor Mario Draghi surprised financial circles by saying that he had serious concerns about the influence of political forces on the work of global central banks, especially, as he put it, central banks of leading jurisdictions. You don't have to be a jack-of-all-trades to understand that Mario Draghi's words refer to President Trump's harsh criticism of the Fed's actions.

We will try to figure out how the relationship between the U.S. president and the Fed works, and whether Trump can have any real influence on Jerome Powell's agency.

History of conflict

Since 2015, the Fed has decided to raise interest rates nine times. The tightening of monetary policy has naturally led to a strengthening of the dollar.

Seven of these nine raises occurred during Trump's presidency. Recall that the current American leader's policies are based on protectionism, so US currency appreciation creates additional difficulties for her.

For some time, the actions of the Fed have caused the current U.S. president to have a strong aversion to it.

The head of the Fed, Jerome Powell, has long been referred to as "Trump's man," since he was appointed to the post at his behest. It was believed that Powell would adjust the Fed's monetary policy in favor of the president's protectionism.

In reality, more recently, Trump has voiced his displeasure with Powell's actions, calling him a "gentleman Fed official" and a fan of the strong dollar, as well as stating his intention to fire him as head of the Federal Reserve.

How the Fed and the President of the United States are related

The U.S. Federal Reserve is perhaps the most specific of all the world's central banks. It is an independent federal institution, with private ownership of capital.

At the same time, the U.S. Congress has control over the objectives of the Fed, but cannot influence in any way the actions aimed at achieving these goals. The U.S. president, in turn, cannot interfere with the Fed's monetary policy, even at the level of executive orders.

Nevertheless, the president does have indirect influence on the regulator. The fact is that the Fed is headed by the Board of Governors, which consists of seven people.

Thus, the maximum number of members of the Board of Governors who can lobby for the U.S. president at the Fed can be up to four people if the president is elected for a second term. Nevertheless, everything is not so smooth, since each appointment must still be approved by the U.S. Senate.

In addition, the Fed law gives the President of the United States the right to fire any member of the Board of Governors of the Fed.

What the composition of the Fed looks like now

Trump's dissatisfaction with Fed policy becomes clearer when we look at the composition of the Board of Governors. Several members vacated their seats before their 14-year terms expired, giving Trump the opportunity to appoint four of "his people," one of whom is Jerome Powell.

Despite the Trump majority on the Board of Governors, all of the decisions to raise interest rates and tighten monetary policy were taken unanimously, which seems to be causing a sharp negative reaction from the president.

Rumors are circulating in financial circles that Trump is now picking up two more candidates for the Board of Governors. This has already caused concern for both American political parties. Both Republican and Democrat observers are keeping this process under constant review, so it is unlikely that the U.S. Senate will allow Trump to change the established apolitical nature of the Federal Reserve.

What can Trump really do?

It is worth noting that the U.S. ruling circles have a long tradition of not commenting on the actions of the Fed, which has been respected by U.S. presidents for 25 years and was violated by Trump. By the way, even during the election campaign, he criticized the actions of Jeannette Yellen, then head of the Fed.

As we said above, the President of the United States can fire any Board of Governors, but the grounds for firing must be negligent performance or inefficiency, not displeasure of the head of state.

Given that no member of the Board of Governors has ever been fired by a president in the history of the Fed, the threat of Trump removing Jerome Powell as head of the Fed seems a stretch. Moreover, Powell has already stated that he will seriously resist any attempt to fire him.

In conclusion, it should be noted that in U.S. history there has already been one confrontation between the President of the United States and the head of the Fed. In 1965, Fed Chairman William McChesney Martin refused to comply with President Lyndon Johnson's demand to reduce the interest rate.

When Johnson asked the U.S. Justice Department if he could fire a member of the Board of Governors, he received a clear answer that a disagreement over monetary policy could not be grounds for dismissal.

Thus, Trump is unlikely to have any real influence on the Fed's actions. Still, there is a danger. As Mario Draghi correctly noted, such confrontation significantly undermines confidence in central banks. To disrupt the stability of financial markets and throw them into chaos, it will be enough if major investors believe that the Fed is making decisions under pressure from the U.S. president, even if it is not actually happening.

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