The Fed's Mouthpiece: Trump’s Bid to Reshape the Federal Reserve Faces Its Toughest Constraint

Author: jin10

TechFlow: The Democratic Party's regained control of the Senate following the US midterm elections has created an institutional check on Trump's radical plans to reshape the Federal Reserve Board through appointments. Nick Timiraos, chief economic correspondent for The Wall Street Journal, pointed out that even if new Chair Kevin Warsh takes office smoothly, he will struggle to plant his allies on the seven-member board to build absolute control.

Several former officials and current board members within the Fed have clearly stated their resistance to executive interference. The Banking Committee's oversight authority at the Senate will directly block nominations of allies into vacant seats. This new power struggle between the White House and the central bank is shifting from overt pressure to a complex game of institutional defense lines.

Nick Timiraos, chief economic correspondent for The Wall Street Journal and known as the "Fed Whisperer," wrote that the results of the US midterm elections have shifted the power dynamic between the Trump administration and the Federal Reserve, providing the strongest check thus far against Trump's efforts to control the Fed. With Democrats controlling the Senate, they will gain greater leverage over Fed appointments and the ability to block Trump from inserting more allies onto the Fed Board.

Although Trump can appoint his chosen candidate, Kevin Warsh, as Fed Chair, he lacks one more supporter to secure a majority on the seven-member board. Today, the prospects of gaining this seat have noticeably narrowed.

The White House under Trump has launched the most direct challenge to the Fed's independence in decades, including unprecedented attempts to dismiss current board members. Previously, checks on Trump came from several fronts: a retiring Republican senator blocking Fed appointments; Jerome Powell deciding to remain on the board as a governor after stepping down as chair; and courts temporarily allowing Governor Lisa Cook to continue her duties.

With Democrats controlling the Senate, these fragmented checks will coalesce into broader institutional constraints. During Trump's remaining term, Democrats will be able to exercise gatekeeping authority over all personnel nominations to the seven-member Fed Board.

Mark Spindel, an investment manager who studies the relationship between the Fed and Congress and co-authored works on the subject, believes Trump's plan to reshape the relationship between the Fed and the White House has suffered a major setback. "It was clearly dashed last Tuesday," Spindel said.

He added, "He will no longer be able to get his people onto the board, nor fill partisan governor seats. It's over."

Hindered Appointments Make It Difficult for Trump to Control the Fed Board

Currently, Trump has appointed three of the seven Fed governors, including Warsh. Under current arrangements, the next board vacancy will come from Powell, whose governorship runs until January 2028.

Trump is also attempting to create a new board vacancy by firing Cook, citing alleged mortgage fraud. Cook has denied the allegations, and the White House plans to hold a hearing on the matter in December.

In June, the US Supreme Court ruled that Cook could remain in place while she legally challenges the dismissal decision. Even if Trump ultimately wins the lawsuit, the Democrat-controlled Senate may still refuse to confirm a successor, leaving the seat vacant for an extended period.

Democrats have previously collectively opposed multiple Fed nominees put forward by Trump. Last year, when Michelle Bowman was nominated to serve as vice chairman for supervision, not a single Democratic senator voted in favor.

A few months later, Stephen Miran was nominated to fill a Fed governor vacancy, similarly lacking Democratic support. In May this year, Trump nominated Warsh to become Fed chair, receiving backing from only one Democrat: Senator John Fetterman of Pennsylvania.

If Democrats continue to block Trump's personnel nominations, his ability to change the Fed's policy direction through appointments will be constrained. Historically, presidential influence over Fed monetary policy has primarily flowed through appointments.

Trump has never hidden his desire to lower interest rates, but the US president lacks the authority to set rates directly. Rate decisions are discussed and made by committees of Fed officials, most of whom are not presidential appointees.

Policymaking discussions at the Federal Open Market Committee (FOMC) involve 19 officials, but only 12 have voting rights at each meeting. These include the seven presidentially appointed Fed governors, the president of the Federal Reserve Bank of New York, and four of the other 11 regional Fed presidents. These four seats are held by non-political appointees and participate in voting on a rotational basis.

Currently, Trump-appointed officials hold only three of these 12 voting seats.

As inflation returns to the forefront of monetary policy focus, the actual policy direction under Warsh's leadership at the Fed is moving opposite to Trump's desired rate-cutting path. The Fed raised rates for the first time since 2023 in September and held them steady last month. Investors currently expect the Fed to raise rates again in December.

Trump blames this situation on the so-called "politicized" board, believing board members harbor animosity toward Warsh. Cook was one of two officials last month who supported raising rates and cast dissenting votes.

However, a single dissenting vote has limited impact on FOMC decisions. Miran is a senior White House economic advisor who Trump placed on the Fed board last year. Before stepping down in May this year, he consistently supported a more dovish monetary policy in the six meetings he attended, but only once had another official share his stance.

Chart: Composition of Fed Board and FOMC Voting Members

Warsh's Reform Plans Face Internal Resistance

Democratic control of the Senate affects Warsh not only by limiting Trump's ability to increase board seats, but also by making it difficult for him to select his own core team.

Timiraos wrote that Warsh hopes to comprehensively reform the Fed's external communication channels, economic assessment mechanisms, and balance sheet management practices. But if the White House cannot reach an agreement with Senate Democrats, these reforms will depend on Warsh persuading existing board members.

The current board includes three governors appointed by former President Biden, as well as Warsh's predecessor, Powell. None of these members were selected with Warsh's involvement.

Monetary policy often hinges on how the Fed Chair steers the median position within the committee and fosters consensus among members. Past Fed chairs have typically relied on core assistants they helped select to consolidate policy stances and drive decisions.

Ben Bernanke, who took office in 2006, soon welcomed Warsh and Frederic Mishkin to the board. Warsh had assisted Bernanke in advancing the nomination confirmation process, while Mishkin was a co-author of Bernanke's research on inflation targeting.

In 2014, veteran central banker Stanley Fischer became Yellen's deputy months after she assumed the Fed chairmanship. In 2018, Powell also worked behind the scenes to ensure he could appoint Richard Clarida, a like-minded official, as vice chairman.

Timiraos noted in the article that Democratic control of the Senate will also give them a say in the selection of the successor to Vice Chairman Philip Jefferson in September next year. Even if Trump nominates a current Fed governor, the nominee must still be confirmed by the Senate. Bowman went through the same process when promoted to vice chairman last year.

Derek Tang, an economist at Monetary Policy Analytics, stated that past Fed chairs have all relied on "a very strong vice chairman" to help refine their personal policy ideas and drive committee consensus.

He believes that for Warsh, "this path indeed appears to be narrowing."

However, even without new governors joining, Warsh still retains room to influence Fed operations. As Fed Chair, he determines the board's agenda and can also influence staffing arrangements for senior Fed officials.

In his first five months in office, Warsh has already shortened press conference durations and announced that rate-setting meetings will be reduced starting next year.

Timiraos wrote that in banking supervision and payment systems, related decisions are made solely by the Fed Board. Democratic control of the Senate may have a relatively limited direct impact on these policies, as the board rarely passes major regulatory rules by narrow 4-to-3 margins.

But if Trump fails to appoint a fourth governor, Bowman's push to ease capital requirements for large banks, along with initiatives to open the Fed's payment system to non-bank institutions, may require the support of a Democratic appointee to pass.

Furthermore, whether Powell or other current governors choose to leave the board early remains an open question. The key lies in whether they believe the Fed's customary institutional arrangements are sufficient to safeguard central bank independence.

In April, Powell acknowledged that his decision to remain on the board after his chairmanship ends was unusual. He stated his hope that the relationship between the Fed and the executive branch could "return to a state of respecting statutory requirements and long-standing traditions, which means letting the Fed operate according to its mandate".