A watershed legal battle over the White House’s attempt to oust a sitting Federal Reserve governor has only just begun, but if President Trump gets his way, it could leave him with much more latitude to steer the central bank’s decisions on interest rates and its oversight of Wall Street.
Mr. Trump is already relishing the idea.
“We’ll have a majority very shortly,” Mr. Trump said at his latest marathon cabinet meeting about the Fed’s powerful seven-person Board of Governors. “So that’ll be great.”
Mr. Trump plans to appoint loyal individuals to that board, and he would need to fill just one more seat for the balance of power to tip further in his favor. If that happens, it would give the president immense sway over an institution that is supposed to operate independently from the White House.
The president could also gain substantial leverage over another part of the Federal Reserve system — the 12 regional banks whose officials take turn voting on policy matters. The central bank’s staff are vulnerable, too.
“With four on the board, the president and his administration can have a big influence,” said Gary Richardson, a professor of economics at the University of California at Irvine. “It gives them ways to push.”
That kind of power is desired by Mr. Trump, who has for months harangued the Fed to lower borrowing costs and has made little secret that he would like Jerome H. Powell, the Fed’s chair, to resign. But until August, the chances that Mr. Trump could so swiftly gain a majority of support on the board seemed far-fetched.
The president’s first big break came when Adriana D. Kugler hastily stepped down months before her term as a governor was set to end. The president tapped Stephen I. Miran, a vocal critic of the Fed who most recently served as one of Mr. Trump’s top economic advisers, to take Ms. Kugler’s place. He could be confirmed by the Senate in time for the Fed’s next policy meeting in September.
Mr. Trump’s second break could come if the courts are persuaded that he is allowed to remove Lisa Cook, a governor, over allegations that she committed mortgage fraud. The law stipulates that a president can fire a member of the board only “for cause,” which is interpreted to mean professional neglect or malfeasance. Ms. Cook, who has not been charged with any crime or convicted of any wrongdoing, filed a lawsuit on Thursday against Mr. Trump seeking to retain her position. Her lawyers have argued that the allegations are not enough to meet the “for cause” test.
If the courts disagree, Ms. Cook’s departure would allow Mr. Trump to put forward yet another nominee. In his first term, he appointed Christopher J. Waller and Michelle W. Bowman to the board. He also elevated Mr. Powell to become the chair. Mr. Trump will get a chance to name a new chair soon given that Mr. Powell’s term ends in May.
Selecting who is in the top job will only bolster Mr. Trump’s grip on the institution.
What the president wants most is borrowing costs that are substantially lower. However, that may be the area he will face the biggest hurdles to control — even with a majority of the board in his corner.
Interest rate decisions are made by a 12-person Federal Open Market Committee, which is comprised of all seven governors as well as a rotating cohort of five presidents from the regional reserve banks.
Still, there are ways that four governors can significantly impact the debate. In recent decades, the policy-setting committee has governed as a cohesive group, meaning there have been few dissents, especially from members of the board. That changed notably last month when Mr. Waller and Ms. Bowman voted against the Fed’s decision to hold interest rates steady in what was the first double dissent from officials of that stature since 1993.
If four governors are consistently dissenting and advocating instead for policy moves that comply with what the president wants, that will inherently shape the contours of the debate around what is best for the economy. At the same time, it risks creating a lot of noise around those decisions, potentially sowing confusion about the path forward for interest rates.
One of the most powerful things that a majority of governors could do affects the presidents of the reserve banks. Every five years, the Fed’s board must vote to approve the reappointment of all 12 policymakers. This is typically a routine matter, but the looming March deadline has now taken on new significance. If Mr. Trump has enough governors willing to do so, they could decline to reappoint the policymakers.
“Gaining control of the board by that time could result in an attempt to displace some of the presidents,” warned Janet L. Yellen, who was Mr. Powell’s immediate predecessor as Fed chair and later served as Treasury secretary under President Joseph R. Biden Jr.
In 2022, Mr. Waller and Ms. Bowman abstained from voting to approve Austan D. Goolsbee to lead the Federal Reserve Bank of Chicago. Mr. Goolsbee, who previously served in the Obama administration, assumed office early the subsequent year.
There are limits to this strategy, however. Regional presidents are not nominated by the president and do not need Senate confirmation like members of the board do. Rather, presidents of the reserve banks are selected by local directors. The Fed’s board can ultimately veto who is picked for those positions, but they are not the only ones involved in the selection process.
Kathryn Judge, a professor at Columbia Law School who focuses on financial regulation, said the Fed’s board was also likely to have the authority to adjust how geographic lines were drawn separating the regional banks, but it was unclear whether a district could be completely eliminated.
A compliant majority could also have influence over other big decisions related to the Fed’s huge balance sheet or its provision of dollars during times of crisis via so-called swap operations with other central banks around the world. Rulings related to the regulation and supervision of the country’s biggest banks are made solely by the board, meaning a simple majority would clear the way for any changes the president wants made.
The Fed meets eight times a year to decide on interest rates, but it takes only three members of the F.O.M.C. to call for an official gathering. Graham Steele, a longtime financial regulation lawyer and former Treasury Department official, warned that this rule could be used to make “additional mischief that could really affect the substance of monetary policy,” if Mr. Trump’s allies called for those meetings to push for actions endorsed by the president.
Ms. Yellen also worried that Trump-appointed governors could seek to oust the Fed’s staff. Before his nomination to the Fed, Mr. Miran advocated for more direct political control over personnel.
“It seems to me that you could see some substantial personnel changes at the board, getting rid of people with expertise who have always supported independence and careful analytic and data work, the core professional staff,” Ms. Yellen said, noting that Mr. Trump had done so at other agencies. The loss of such people at the Fed, she said, would have “profoundly negative consequences on monetary policy.”
If these changes transpire, the worry that economists most often cite is that the world will start to question whether the Fed is indeed the credible organization that has served as the foremost pillar of not only the U.S. economy but also the global financial system.
“All of this is not only unprecedented but also unconstructive,” said Douglas Rediker, a former U.S. representative at the International Monetary Fund and a founder of International Capital Strategies, an advisory firm. “It sends a message that is more akin to a chaotic, dysfunctional system than what the markets in the U.S. and globally have always assumed of the Fed, which is that it is the gold standard for governance, for independence, for prudence and for policymaking.”
Ben Casselman contributed reporting.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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