The ability of the White House to influence the Federal Reserve is a topic of significant interest and constitutional debate. According to UBS analysts, the Federal Reserve’s structure and its interaction with the executive branch have evolved considerably over time.
The investment bank explained in a note this week that initially, from 1913 to 1935, the Treasury Secretary and Comptroller of the Currency were members of the Federal Reserve Board.
True independence for the Fed was established in 1951, they stated. The 1977 Federal Reserve Reform Act formalized its dual mandate of maximum employment and stable prices. Congress has continued to refine the Fed’s role, with the 1978 Humphrey Hawkins (NASDAQ:HWKN) bill setting numerical targets for unemployment and inflation, and the 2010 Dodd-Frank Act limiting the Fed’s emergency powers.
UBS clarifies that the President’s most direct influence over the Federal Reserve is through appointing the seven members of the Board of Governors. These appointments, which require Senate confirmation, are staggered with 14-year terms to ensure continuity. The President can only remove Governors “for cause,” which is interpreted as inefficiency, neglect of duty, or malfeasance, rather than policy disagreements.
Additionally, the President appoints the Chair of the Board of Governors, also subject to Senate confirmation.
The bank says that the statute does not clarify if the “for cause” threshold applies to the Chair, so any attempt to remove the Chair might require judicial clarification. Any removed Chair can remain as a Governor, and the FOMC, which sets interest rates, elects its own Chair.
Meanwhile, UBS notes that the 12 regional Federal Reserve Banks have their own boards, selected by district member banks, and approved by the Board of Governors. They state that while the President could theoretically influence the Board to remove reserve bank presidents, this is complex and unlikely.
The investment bank adds that historically, Presidents have often clashed with Fed Chairs.
“To the extent one party controls both the White House and Congress, the influence over monetary policy could shift, not only via nominees, but because legislation becomes a potential course of action,” wrote UBS. “That could include how the FOMC sets its inflation target, or how aggressively it is pursued.”