Trump's Plan to Reshape the Federal Reserve Could Give Him Control Over Interest Rates

President Trump's recent comments about the Federal Reserve and his effort to oust Governor Lisa Cook could give him a majority on the Fed's Board of Governors, allowing him to exert greater influence over future decisions on interest rates. This would be achieved through a little-known process, where the Fed Board must approve the new terms of regional Fed presidents, who vote on a rotational basis on interest rates.

Key Takeaways:

• If Trump successfully ousts Governor Lisa Cook, he could claim a majority of the seven members of the Fed's powerful Board of Governors.
• A Trump-appointed majority on the Fed Board could exert greater influence over future decisions on interest rates by using a process where the Fed Board must approve the new terms of regional Fed presidents.
• This process could allow the Fed Board to reject regional presidents who do not back lower interest rates and are not comfortable with White House influence over monetary policy.
• The Federal Open Market Committee, which decides on interest rates, could undergo a radical reconstruction, with the seven governors of the Fed Board potentially voting to reject regional Fed presidents who do not align with Trump's policy goals.
• A number of hurdles, including the willingness of existing Fed governors to cooperate and legal challenges, stand in the way of Trump's plan to reshape the Fed.
• Trump's effort to force out Cook may fail, or drag out, with Cook's lawyer signaling a lawsuit challenging her termination is imminent.

Statistics:

• 12 regional Fed banks stretch across the country, with regional Fed presidents selected and reappointed by local directors but approved by the Washington-based Fed Board of Governors.
• The Fed Board has "never" voted down a regional Fed president or removed one from power, according to Jim Bianco, president of Bianco Research.
• However, Fed governors Bowman and Waller did abstain from the vote to approve Chicago Fed President Austan Goolsbee in January 2023.
• The FOMC, which decides on interest rates, consists of the seven members of the Fed Board and five regional Fed presidents.
• The Fed's rate-setting committee is made up of 12 members: 7 governors of the Fed Board and 5 rotating regional Fed presidents.

Sources:

• Jaret Seiberg, financial services policy analyst at TD Cowen Washington Research Group, wrote in a note to clients: "The President could push his majority to reject reserve bank presidents unless they agree to back lower rates and are comfortable with more White House influence over monetary policy."
• Tim Mahedy, a former top official at the San Francisco Fed, told CNN: "To those in Congress who may be wondering if this is the line in the sand, it is. Over 100 years of economic prosperity is at risk."
• Jim Bianco, president of Bianco Research, said on X: "The Federal Open Market Committee (twelve district bank presidents and seven governors) would undergo a radical reconstruction, not unlike the Fed's Washington building complex."
• Narayana Kocherlakota, a former president of the Minneapolis Fed, told CNN: "Typically, this is a very routine process. It would be good to have a more open and deliberate process."
• Seiberg noted that the Fed Board typically approves regional Fed presidents in late January - around a month before their terms expire.
• According to prediction platform Polymarket, there is just a 25% chance that Cook is out as Fed governor by year-end.