Biden's Picks May Hinder Trump's Fed Overhaul

The Federal Reserve's Leadership Transition and Political Dynamics

President Donald Trump's upcoming nomination of a new member to the Federal Reserve's Board of Governors is expected to draw significant attention. This move comes at a time when the plans of three individuals appointed by his predecessor, along with Fed Chair Jerome Powell himself, could serve as a counterbalance against any attempts to change monetary policy or the central bank’s operations.

The recent resignation of Fed Governor Adriana Kugler has created an unexpected opportunity for Trump to fill a seat months earlier than anticipated. The chosen individual could potentially act as a Fed chief-in-waiting until Powell's term ends in May, or, if Trump elevates Governor Christopher Waller, add another supportive voice to the board.

Trump has indicated that he plans to announce a nominee soon. However, this move does not guarantee an end to his frustrations with the central bank, which operates with a slow turnover of policymaking members and a decentralized structure designed to limit the influence of elected officials.

The Power and Limitations of the Fed Chair

According to former Fed Vice Chair Donald Kohn, who now serves as a senior fellow at the Brookings Institution, the new chair will need to secure agreement among all decision-makers. "The chair is very powerful," Kohn said, "but decisions are made by the board and by the Federal Open Market Committee. The chairman gets other people to sign on by winning arguments, by being right."

After cutting interest rates three times in the final four months of 2024, including twice after Trump's election victory, the Fed has maintained steady rates to observe how rising import taxes, an immigration crackdown, and tax cuts affect its mandate of keeping inflation low and employment high. While Fed officials remain uncertain about the outcome, Trump has viewed the pause as evidence that Powell and his colleagues are acting politically to undermine him.

Trump has promised to nominate someone who supports lowering the Fed's benchmark overnight interest rate, which he wants reduced as low as 1% from the current 4.25%-4.50% range.

However, the top Fed position carries only one of seven votes on the Washington-based board when it comes to key internal issues like hiring senior staff, budgeting, and overall staffing. On interest rates and communications policy, the chief has just one of 12 votes on the rate-setting FOMC, which sets policymaker communications guidelines and annually approves a set of operating principles.

Challenges and Constraints for a New Chair

Despite the potential for change, the new Fed chair would face significant challenges. Former Fed Governor Kevin Warsh, a person under consideration, has spoken about "regime change" and "breaking some heads." However, such ambitions would require support from Biden's appointees, the heads of the 12 regional Fed banks, and possibly Powell himself should he choose to remain on the board.

Powell's term as Fed chief ends in about nine months, but he could remain a governor through January 2028, toward the end of Trump's term. For the rest of Trump's presidency, those who would need courting by Powell's successor include Fed Vice Chair Philip Jefferson, Governor Lisa Cook, and Governor Michael Barr, all Biden appointees. Assuming none of them resign, each has a term running to 2032 or later.

Should Powell remain, their votes plus his would form a board majority, with the ability to influence management and regulatory decisions. On interest rates, which are set by the governors along with five regional bank presidents as part of the FOMC, they could exert strong influence regardless of whether Powell leaves in May.

Institutional and Market Constraints

There is also no guarantee that Trump appointees like Waller or Michelle Bowman would agree with any radical overhaul. Waller, in particular, has already rejected some ideas floated by figures like Warsh to dramatically shrink the Fed's balance sheet.

Bill English, a former head of the Fed's division of monetary affairs and currently a professor at the Yale School of Management, noted that "really broad changes would be very tough... There are limits to what a new chair could obtain." He added that "there are also limits to what a new chair would want to attain. You want good staff that are doing smart work."

Unlike other independent agency heads, a new Fed chief would also face the verdict of one particularly powerful constituency: the global bond market, which has enormous scope to set borrowing costs for the U.S. government, businesses, and consumers.

Long-Term Implications and Institutional Legacy

Jefferson, a surprise choice plucked from North Carolina's Davidson College, could stay until 2036, though his term as vice chair ends in September 2027. The term for Cook, who was a Michigan State University economics professor, extends to 2038. Barr stepped down as vice chair for supervision after Trump's inauguration for a second term in January but chose to remain on the board. His term runs until 2032.

The unusual breach between Trump and Powell has added to the complexity of the situation. Fed leadership transitions have long been nonpartisan and amicable, not moments for overhauling policy or remaking the institution, a legacy of a system designed to be at arms length from presidential influence.

As noted in a 2024 analysis of the current system's reformation in the 1930s by Gary Richardson, an economics professor at the University of California, Irvine, and former Fed research director David Wilcox: "The record clearly reveals that Congress wanted the president's hands far from the levers of monetary policy."