Can The President Fire The Chairman Of The Federal Reserve?

The question has arisen, does the president have the ability to fire the chairman of the Federal Reserve. The short answer appears to be no. But few understand the structure of the Federal Reserve and how, by design, that structure both compartmentalizes and is designed to insulate policy making from attempts by outsiders to influence policy.

The Federal Reserve is not a single entity but rather a system composed of two different types of legal entities: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee are both federal agencies and are part of the Executive Branch of the government. Technically, they are among some 61 disparate, independent institutions such as the Commodity Futures Trading Commission, Tennessee Valley Authority, EPA, Federal Election Commission, and General Services Administration, just to name a few.

[3]

Although the FOMC is a separate legal body, it has no office or staff except that provided each year by the Board and reserve banks. Its members include the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four other reserve bank presidents whose rotation on and off the committee is defined in the statute.[5] The importance of this is that removal of the chairman of the Board of Governors does not control who serves as chairman of the FOMC, should any jurisdictional dispute arise between the president and the Fed. That election is specified in the statute and is the prerogative of the voting members. The president has no say in the matter.

In contrast to the Board and FOMC, the 12 Federal Reserve Banks are quasi-public- private entities whose stock is owned by the member banks headquartered in their respective Federal Reserve Districts.

[8]

The Federal Reserve Act, which lays out the structure and duties of the System, has been modified by Congress many times, and relative roles of the respective legal entities have also evolved. For example, in the original structure, the heads of the reserve banks were called governors, and the board in DC had few responsibilities. It was called the Federal Reserve Board, whose members included the Comptroller of the Currency and the Secretary of the Treasury, who also served as chairman. The Banking Act of 1933 created the Federal Open Market Committee as an independent agency, and the Banking Act of 1935 changed the name of the Federal Reserve Board to “Board of Governors of the Federal Reserve System,” and the Board’s members were called governors.[9] The number of governors was increased from six to seven, and the Secretary of the Treasury and Comptroller of the Currency were removed from the Board. The Board of Governors moved its offices out of Treasury into its own building, further distancing itself from the Executive Branch. At the same time, titles of reserve bank governors were changed to presidents, thus completing the shift in control of the system and policy from the reserve banks to the Board of Governors in DC.

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Just as the organizational structure is Byzantine, so are the structure and responsibilities for the key tools of monetary policy, and those complexities can also frustrate the ability of outside forces to influence policy, since different groups of Federal Reserve officials control different policy levers. There are four principal tools employed in the FOMC’s current floor and sub-floor system: the interest rate on reserves (IOER), the federal funds rate target range, the interest rate on overnight repurchase agreements (ON RRP), and the discount rate. The Board of Governors is empowered to set both the discount rate and IOER, whereas the FOMC sets the federal funds rate and ON RRP.

[13]

In the present policy regime, the discount rate – the rate that the Fed charges banks for borrowing – has become largely unimportant. [14] Historically, however, it was the first policy tool the system employed. It was initially was used to accommodate the cyclical demand for credit during the crop cycle, given the agricultural nature of the economy during the Fed’s early years. The discount rate then evolved prior to the financial crisis and passage of permission for the Fed to pay interest on reserves, as the cap or ceiling rate on the FOMC’s funds rate target. It remains the responsibility of each reserve bank’s board of directors to make recommended changes in the discount rate to the Board of Governors every two weeks. Recommendations are staggered so that there is always a fresh recommendation available to the Board. The Board cannot change the discount rate without a recommendation from at least one reserve bank to make a change.

Presently, the discount rate is the same across each Federal Reserve district, but this is true only after each bank’s board of directors makes a change request that is submitted and approved, and this is why there is always a separate announcement of the Board’s approval of discount window changes. The process can sometimes take a few days, but eventually the rates are equalized. Most recently, the Board approved requests from six Federal Reserve banks to increase the discount rate for primary credit to 3% effective December 20, 2019.

The complex organizational structure combined with split authority for the policy tools has led the Board and FOMC to hold joint meetings in which policy is set.

[15] This arrangement was an organizational response by Chairman Bernanke to create a more collegial and cooperative environment for policy setting with all participants present and participating in the decision process. But all this could be undone by another chairman or by a split within the system concerning the relative roles of the Board and FOMC. For example, a return to a low volume of excess reserves and a resurgence of a specific federal funds rate target rate instead of a range would change the relative importance of Board and reserve bank presidents in the policy-setting process. At the same time, the Committee’s flexibility to change how policy is formulated and implemented provides additional potential insolation from outside pressures to affect or influence the setting of policy.

https://www.usa.gov/independent-agencies

[2] This intent has been frustrated by resignations, enabling a president to make appointments to fill unexpired terms. President Trump has been able to make four appointments in just the first two years of his tenure. Recently appointed Governor Bowman’s term expires in 2020 and Governor Clarida’s term expires in 2022. Presently unconfirmed appointments of Professor Goodfriend and former Fed staffer Nelly Liang are for terms expiring in 2024 and 2030. People filling unexpired terms may be appointed to a full term.

[6] Although member banks own stock in their reserve bank, the stock is nonvoting and carries a fixed dividend.

[9] Until a change in the Banking Act of 1935, Federal Reserve Board members were not voting members of the FOMC.

[10] Prior to the financial crisis, the principal tool was the federal funds rate, but under the present regime the Board of Governors controls the floor and lower bands of the policy corridor whereas the FOMC sets only the target range within the corridor.

[12] For the rationale for setting the ON RRP rate slightly below the IOER, see Steven Williamson, “Monetary Policy Normalization in the United States,” FRB St. Louis Review, second quarter 2015, 97(2).

https://www.federalreserve.gov/newsevents/pressreleases/monetary20181219a1.htm .

[14] There are three main categories of discount lending, and these have varied over time.

https://www.federalreserve.gov/monetarypolicy/files/FOMC20090116confcall.pdf .

Written By: Cumberland Advisors