One of the many populist stances that Donald Trump took during the election was that the Federal Reserve should at least be audited and held accountable for its actions, and perhaps be abolished by Congress. Trump, who whipped up a frenzy of anti-Fed sentiment on the campaign trail, may feel he now has to follow through on his promises.
The Federal Reserve has long been a target of Republicans, especially since the global financial crisis. The bailout of the giant “Too Big To Fail” banks that were responsible for the crisis in the first place, followed by years of quantitative easing (“money printing”) has inflamed the passions of many conservative voters.
Trump would rather Congress focus on more pressing matters, such as repealing NAFTA and punishing companies that make goods abroad to sell in the US, instead of focusing on the Fed right away. In the meantime, what can Trump do unilaterally to remake the Fed in his own image?
Monetary Policy, Trump-Style
The first and easiest thing that Trump can do is appoint a Treasury Secretary that shares his views about the Fed. That person, if approved by the Senate, will be Hollywood financier Steven Mnuchin, Trump’s campaign finance chairman. (Mnuchin has produced 35 movies, including such blockbusters as Batman vs Superman, Suicide Squad, American Sniper, and The Lego Movie.) The months that Mnuchin and Trump spent together on the campaign trail guarantees that they are on the same page when it comes to the Fed.
Another obvious action for Trump will have direct consequences for the Fed. Two of the seven seats on the Federal Reserve Board of Governors are vacant, and can be filled by Trump immediately. His choices will be quickly approved by the Republican-dominated Senate. Importantly, they could be approved soon enough to vote in the Fed Open Market Committee March meeting. This should be one of Trump’s more urgent moves in his first 100 days in office.
What Is The Federal Reserve Open Market Committee (FOMC)?
The Open Market Committee of the Federal Reserve meets eight times a year to set monetary policy for the United States. It is perhaps the most powerful monetary body in the world. Of the 19 senior Federal Reserve officials who attend the meeting, only 12 cast votes.
The permanent voting members are the seven Fed Governors, including the Chair and Vice Chair; and the president of the New York Fed (since Wall St is where all the banking giants are headquartered). The remaining four seats are rotated among the other 11 regional Fed presidents.
Trump: Reshaping the Fed In His Image
Since the regional presidents are elected by their respective board of directors, Trump has no control over them. While the Administration could theoretically work behind the scenes to influence the board, in reality it would be nearly impossible. Therefore, Trump’s targets are the members of the Fed Board of Governors.
Each Governor is nominated by the President of the United States and confirmed by the Senate to serve a single 14-year term. From the pool of seven Governors, two are appointed to serve four-year terms as Chair and Vice Chair of the Federal Reserve, again, upon confirmation by the Senate. While a Chair or Vice Chair is allowed to serve out the rest of their 14-year term after being replaced as the leaders of the Fed, most resign their position to avoid any awkwardness.
Although members of the Federal Reserve Board of Governors cannot be removed from office due of their monetary opinions, they are free to resign before their 14-year term expires. In fact, many do so without being pressured, as the job doesn’t pay much at all (it’s nice to have on a resume, though).
Fed Chairmen, however, have come under Presidential pressure to resign on several occasions. Two of the more recent were William McChesney Martin, Jr by President Nixon, and Paul Volcker by President Reagan. It is widely expected that Janet Yellen will soon see a concerted effort by the Trump Administration as well as the Republican-controlled Congress to force her to retire early.
Fed Board: Not A History Of Long-Term Employment
Since the first Federal Reserve Board of Governors met in 1914, 88 people have served on the board. Of these 88 Fed Governors, only 9 have served a full term. Since 1965, the average term of service has been 5.8 years. From 2000 to 2016, the average term of service has been 4.75 years. Taking these numbers into account, what are the chances that President Trump will get to name more than two Fed Governors in his first term?
The Waiting Game
Janet Yellen’s position as leader of the Fed ends in February 2018. Stanley Fischer’s stint as Vice Chairman ends that June. Normally, you would expect both to resign in order to give the new leaders a clean slate. However, Yellen’s term as a member of the Fed’s Board of Governors does not end until January 2024, at the very tail-end of a Trump second term, or end of the first term of a new President if Trump isn’t re-elected. Fischer’s term ends in 2020.
Yellen and Fischer could both decide to stay on after relinquishing their leadership positions, just to deny Trump the opportunity to name two more Fed Governors and gain an ideological majority on the Board.
What about the other three Governors?
Many Fed Governors are academic economists, who risk losing tenure if they are away for more than 2 or 3 years. Others are picked for Treasury Department jobs. In fact, that is how the two present vacancies on the board happened. In 2014, Sarah Raskin was named Deputy Secretary of the Treasury, and Jeremy Stein resigned to return to Harvard. No one has resigned since then, aside from Ben Bernanke, who followed precedent and resigned in 2014 after his 8 years as Fed Chairman expired.
Are we overdue for someone to leave?
Daniel Tarullo is 64 years old. He was appointed in 2009 to complete an unfinished term that expires in 2022. He has served eight years already, almost twice the average term since 2000. He is expected to resign when Trump names a new Fed Chairman in 2018, and go back to teaching law.
Chance of Trump appointing a successor: High
Lael Brainard was appointed in 2014 to finish an incomplete term that expires in 2026. She was widely expected to be named Treasury Secretary in a Hillary Clinton Administration. She may find her stay under a Trump Presidency too uncomfortable to endure, and leave before her term as Governor ends. Should she stay, it would be impossible for Trump to replace her, even if he serves two terms. However, rumors are already swirling that she will leave within two years.
Chance of Trump appointing a successor: Moderate
Jerome Powell, age 63, has been a Fed Governor since 2012. This places him right on the cusp of the 4.7 year average length of duty. There is virtually no chance of him serving his his entire term, which expires in 2028 and would make him 75 years old.
Chance of Trump appointing a successor: High
Outlook For A Trump Fed
Trump has a good position to work with, when it comes to the Fed. He will get two of his people on the Board of Governors immediately. When Yellen’s stint as Fed Chairman and Fischer’s term as Vice Chairmen expire in 2018, Trump can name his two people to lead the Fed. This is guaranteed.
If Yellen and Fischer “do the right thing” and retire after losing their leadership positions, that will open up two more seats on the Board of Governors to fill, giving Trump four out of 12 votes and a 4-3 majority on the Board of Governors.
If the odds fall in his favor, there will be at least two seats vacated and maybe three. The elderly Powell and Tarullo are almost certain to resign in the next two years, and Hillary partisan Brainard may very well leave early. Conversely, she may decide to stay on to prevent Trump from naming her successor.
Donald Trump could nominate as few as two, or as many as all seven members of the Fed Board of Governors in the space of two years. Since there are only five voting regional Fed presidents on the FOMC, Trump would in effect control the Fed through his seven Governors, and could push through whatever monetary deregulation he wanted.
Even should Trump not want a fight with the Fed to be the first thing he focuses on in his Administration, he may find he gets everything handed to him without a fuss.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.