Notice & Comment

The Fed’s “nuclear option” for checking the Trump Administration (Trump versus the Federal Reserve, part III)

Yesterday, I discussed why the Fed’s political power is something that both it and the Trump Administration should consider in the coming confrontations that one can expect between them. Today, I want to focus on the Fed’s legal strategy by resurrecting statutorily permissible but largely discarded patterns of Fed governance that could require Trump to face reelection in 2020 before fully gaining control of the Fed’s policy-making apparatus.

The statutory design of the Federal Reserve System puts a hard limit to the President’s ability to staff the Fed. Each of the Fed’s seven governors are presidential appointments that require Senate confirmation, but the terms of service are 14 years—obviously much longer than a president’s. Fourteen is not a random number: it is meant to give each president only two appointments to the Board before facing the national electorate. In order to preserve that gap, the Federal Reserve Act allows the President to fill the stub terms of a predecessor who leaves before the fourteen years are up.

The Fed’s senior leadership is different. The three leadership positions—Fed Chair, Vice Chair, and Vice Chair for Supervision—each serve a four-year term. But this four-year term is in addition to their respective fourteen-year terms.

Right now, there are two vacancies at the Fed that Trump’s transition team has suggested the incoming administration will fill quickly. But that leaves five holdovers from the Obama Administration to wreak havoc. If Trump wants to shape Fed policy through the appointment power, he needs more vacancies.

Here is where things will get interesting. The leadership terms for Fed Chair Janet Yellen and Vice Chair Stanley Fischer expire in February and June 2018, respectively. Several commentators are already declaring these two pending expirations “vacancies” with somewhat alarmist headlines: “Trump will have huge sway over Fed’s future,” says CNN. “With Trump in Power, the Fed Gets Ready for a Reckoning,” the New York Times tells us.

Not so fast. Yellen and Fischer’s terms as Governors don’t expire until January 2024 and 2020, respectively. The other three Governors’ terms don’t expire until 2022, 2028, and 2026. In other words, if the sitting Governors—including Fed leadership—serve their full terms, Trump won’t be able to appoint a majority of Fed Governors until 2022 at the earliest.

Of course, commentators are right to make predictions about quick vacancies based on recent history. There’s been a steady and alarming increase in the frequency and duration of vacancies at the Board. But these are interesting times, and the current Fed Governors would be right to consider their legal ability to stay put until the expiration of their terms. Their legacy, and the Fed’s future, may well depend on it, and nothing short of legislation can take away from them this potent tool.

Any four vacancies will be enough to turn the keys of the Fed over to the Administration, but the most important will certainly be those of Janet Yellen and Stanley Fischer. And a failure to be reappointed as Fed Chair has caused other of Yellen’s predecessors to resign their Governorships with unexpired terms. Perhaps, then, the tradition of Fed leadership leaving the Fed after the shorter terms conclude will mean that Trump will indeed gain a majority of seats before the 2018 midterms.

But perhaps not. I mentioned the Truman Administration’s fight with the Fed culminating in the spring of 1951. Leading that fight—a fight for the future of the Federal Reserve and autonomous monetary policy—was former Fed Chair Marriner Eccles. Eccles was Franklin Roosevelt’s Fed Chair and essentially the author of the Fed’s 1935 redesign that created the legal construct of the modern Fed Chair. But Truman refused to renominate him as Fed Chair in 1948 when his four-year term expired. Rather than leaving the Board, he stayed put, leaking like a sieve to the press about the Fed’s strategy to grant it independence of the Treasury, speaking to bankers and congressional allies in public fora, and otherwise creating problems for the Administration. When the Fed and Treasury finally agreed to a cessation of these political skirmishes, Eccles agreed to leave.

If Eccles is one of the founders of the modern Fed, Janet Yellen is not far behind as a figure of enormous credibility and experience within the central bank. She is indeed the single most experienced central banker in our nation’s history, currently serving her fourth tour of duty on the Federal Open Market Committee. And Stanley Fischer is a leading theorist of central bank independence. For those already certain of Trump’s four appointments should not be surprised if these two central bankers—professionals who have staked their careers on defending the institutional importance of central banks—don’t go quietly into the night.

Of course, it would be no small thing to ask of the sitting Fed Governors to fill their statutory terms and fight against an attempt to render the Fed a partisan political institution. This legal strategy isn’t an ace in the hole, but yet another part of a political contest that could force a president to cudgel the Fed into submission through legislative threats. And in the end, it may not be necessary. The key will be to watch what the Trump Administration does with the two vacancies it already has. If the President-elect fills the roles with candidates of undoubted competence and appropriate distance from the Administration, then there would be little need for this kind of approach.

This should be the test. If Mr. Trump puts forward loyalists with little expertise, anyone who cares about competence at the Fed—and that should be most of us, regardless of politics, and certainly includes sitting Fed Governors—should hope that all five Governors stay put. These kinds of loyalists will fill the gaps in their knowledge using partisan political heuristics, precisely the shortcuts that could render the institutional vitality of our central bank a dead letter.

So call it the “nuclear option”. If Trump appoints Republicans of unquestioned competence, no matter how much they have criticized the Fed in the past, the current traditions of leadership resignation is appropriate and should be followed. But if Trump wants to end the Fed by stacking it with Trumpists, then the Fed should, for the first time in 60 years, recall these important features of statutory design.

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