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Comment: The Fed Chair does not set monetary policy. That is done by the FOMC.

The reports late last week that President Trump was looking into ways to fire Federal Reserve Chair Jerome Powell did not help the overall unsettled feeling for markets. As little as markets may have liked the incremental increase in short-term rates, the actuality was at least well anticipated and clearly communicated. Markets may complain about the decision, but not in how it was carried out.

At this point it is murky whether Mr. Trump did explore the legality of firing his Fed Chair, or if Administration officials felt a need to tamp down negative press by denying the reports. In any case, it now appears that it is less likely that the White House would try to remove Powell from his post as Chair.

Powell’s installation as Chair ten months ago was welcomed by markets as a person who would provide continuity to monetary policy as well as someone who would be sympathetic to reducing regulation associated with the Dodd-Frank act. At the very least he has proven to be both, as well as a Chair determined to provide clear and consistent communications and to improve transparency while maintaining the independence of the central bank. If he did not bring the same economic credentials that his four predecessors in office did, he has proven to be an experienced central banker who is thoughtful, moderate, and able to build consensus.

If Mr. Trump did decide to fire Powell, and if he succeeded in doing so, would it actually have a big impact on the outlook for monetary policy?

The Chair does not set monetary policy. That is done by the full FOMC. The FOMC consists of the Board of Governors and the 12 District Bank Presidents. FOMC voters are the seven members of the Board and five District Bank Presidents (the New York Fed has a permanent vote, the remaining four vote in a set rotation). The Chair is the only person who can speak for the FOMC as a whole, but he/she is only one member.

It has been pointed out that if Powell was unseated as Chair, he would still be a governor and thus eligible to vote on interest rates at the FOMC and participate in setting rates with the rest of the Board of Governors. However, even if he left the Board entirely, it would not automatically change the dynamic for monetary policy.

If at this point Powell were forced out, the acting Chair would be the Vice Chair Richard Clarida. Clarida may be a Trump appointee, but it would be a huge surprise to find him to be a Trump loyalist who would bow to the President’s wishes. Even if this were the case, he only has one vote on the current Board among the four (if Powell left) or five (if Powell stayed) and/or one among the FOMC voters (five District Bank presidents plus seated Governors). The consensus on the Board and FOMC would probably remain consistent with further gradual and incremental removal of interest rate accommodation.

The historical influence of the office of the Chair is considerable. That it would override a bloc of moderate-to-hawkish voters is highly improbable.

Furthermore, getting a Trump loyalist confirmed as new Chair would be an uphill battle, a Republica majority in the Senate or no. Witness the nomination of Marvin Goodfriend that remains in limbo nearly a year after his confirmation hearing and narrow approval by the Senate Banking Committee. Anything like a problematic performance in the confirmation process and/or controversial views on the economy and/or monetary policy could doom a candidate from the start.

The Administration would be required to nominate as Chair one of the present Governors or put forward a new name for Governor and Chair.

The former would present a number of challenges. Vice Chair Clarida could be a logical choice, but he is only recently installed and his term as Governor expires on January 31, 2022. It would also mean having to nominate a new Vice Chair which would bring further complications to getting the Board up to strength. Vice Chair for Supervision Randal Quarles might have some upside as a Governor with a term through January 31, 2032, but his office as Chair of Supervision took a long time to fill and he has only been in place for little more than a year. As an Obama appointee, Governor Lael Brainard is a complete nonstarter as a candidate. Governor Michelle Bowman is possible, but her term expires January 31, 2020 and she lacks a significant public record in central banking circles.

The latter is the more likely path. If Powell remained as a Governor, the Administration would have to rescind the nomination of one of its two nominees for the Board. Goodfriend’s nomination for the term ending January 31, 2030 is the more at risk than that of Jean Nellie Liang for the term ending January 31, 2024. She has yet to reach the stage of confirmation hearing before the Senate Banking Committee. If Powell left the Board, it would open the term for Governor ending January 31, 2026, and the two nominations in place would be unaffected.

Whatever person could be nominated, it is hard to envision who would have sufficient experience and integrity to fill the post of Chair who would also keep President Trump happy by complying with his desires regarding interest rates. Confirmation hearings are under oath, and nominees are routinely grilled regarding their intention to adhere to the principles of an independent central bank and to faithfully govern monetary policy according to the dual mandate as set by Congress. Policy dove, moderate, or hawk, Republican or Democrat, all are held to a high standard of responsibility in a vitally important post.

Much was made of the timing of the arrival of the Trump Administration and its opportunity to reshape the Board of Governors over a four-year period. It may well accomplish that in terms of having its nominees installed in all or nearly all seven seats. However, it seems that its impact will be more on the side of regulatory reform and less on diminishing the independence of monetary policy.

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