Federal Reserve's Mouthpiece: Trump's Overhaul of the Fed Faces Strongest Checks and Balances

Walsh may find it difficult to assemble his core team.

Source: Jinshi Data

Nick Timiraos, chief economic reporter for The Wall Street Journal and known as the "mouthpiece of the Federal Reserve," wrote that the results of the U.S. midterm elections have changed the power dynamics between the Trump administration and the Federal Reserve, providing the strongest checks on Trump's efforts to control the Fed to date. With the Democrats controlling the Senate, they will gain greater influence over Fed personnel appointments and have the ability to block Trump from placing more loyalists on the Federal Reserve Board.

Although Trump can appoint his chosen Kevin Walsh as Fed Chair, he still lacks one supporter to secure a majority on the seven-member board. The prospects for obtaining this seat have clearly narrowed.

The White House led by Trump has launched the most direct challenge to the Fed's independence in decades, including an unprecedented attempt to fire current board members. Previously, checks on Trump mainly came from several sources: a retiring Republican senator obstructing Fed personnel nominations; Jerome Powell deciding to remain on the board after stepping down as chair; and the courts temporarily allowing Fed board member Lisa Cook to continue in her role.

With the Democrats controlling the Senate, these dispersed checks will form a broader institutional constraint. During the remainder of Trump's term, the Democrats will be able to exercise oversight 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 related works, believes that Trump's plan to reshape the relationship between the Fed and the White House has suffered a significant setback. "Clearly, it was declared dead last Tuesday," Spindel said.

He further stated, "He can no longer get his people into the board, nor can he fill the partisan board seats. This matter is over."

Personnel Appointments Blocked, Trump Struggles to Control the Fed Board

Currently, Trump has appointed three of the seven Fed board members, including Walsh. According to the current arrangement, the next board seat vacancy will come from Powell, whose board term lasts until January 2028.

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

In June, the U.S. Supreme Court ruled that Cook could remain in her position during her legal challenge to 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 opposed Trump's nominated Fed officials collectively on multiple occasions. Last year, when Michelle Bowman was nominated to serve as vice chair for supervision at the Fed, not a single Democratic senator voted in favor.

Months later, Stephen Miran was nominated to fill a vacancy on the Fed board but similarly did not receive support from Democrats. In May of this year, when Trump nominated Walsh to be Fed Chair, only one Democrat supported him, Senator John Fetterman from Pennsylvania.

If the Democrats continue to obstruct Trump's personnel nominations, his ability to change the Fed's policy direction through appointments will be limited. The president's primary means of influencing the Fed's monetary policy has traditionally been through personnel appointments.

Trump has never concealed his desire to lower interest rates, but the U.S. president does not have the authority to directly set interest rates. Interest rate decisions are discussed and made by a committee composed of Fed officials, most of whom are not appointed by the president.

The Federal Open Market Committee (FOMC) policy discussions involve 19 officials, but only 12 have voting rights at each meeting. This includes seven Fed board members appointed by the president, the president of the New York Fed, and four of the eleven regional Fed presidents. These four seats are held by non-political appointees and participate in voting on a rotating basis.

Currently, the officials appointed by Trump hold only three of these twelve voting seats.

As inflation has once again become a focus of monetary policy, the actual policy direction under Walsh's leadership at the Fed is contrary to Trump's desired path of interest rate cuts. The Fed raised interest rates for the first time since 2023 in September and maintained rates last month. Investors currently expect the Fed to raise rates again in December.

Trump attributes this situation to what he calls a "politicized" board, believing that board members are hostile to Walsh. Cook was one of the two officials who voted against the rate hike last month.

However, a single dissenting vote has limited impact on FOMC decisions. Miran was a senior economic advisor at the White House appointed to the Fed board by Trump. Before stepping down in May, he supported a more accommodative monetary policy in all six meetings he attended, but only once received support from another official with the same stance.

Walsh's Reform Plans Face Internal Resistance

With the Democrats controlling the Senate, their influence over Walsh is not only in limiting Trump's ability to increase board seats but may also make it difficult for him to select his core aides.

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

The current board includes three members appointed by former President Biden, as well as Walsh's predecessor, Powell. These members were not selected by Walsh.

Monetary policy often depends on how the Fed Chair guides the committee's internal consensus and fosters agreement among members. Previous Fed chairs typically relied on their core aides, whom they selected, to solidify policy positions and drive decision-making.

Ben Bernanke, who took office in 2006, quickly welcomed Walsh and Frederic Mishkin to the board. Walsh 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 Janet Yellen's deputy just months after she took office as Fed Chair. In 2018, Powell also actively worked behind the scenes to ensure he could appoint Richard Clarida, who aligned with his views, as vice chair.

Timiraos noted that with the Democrats controlling the Senate, they will also have a say in the selection of the person to succeed Philip Jefferson as vice chair of the Fed in September next year. Even if Trump nominates a current Fed board member, it must still be confirmed by the Senate. Bowman underwent this process when she was promoted to vice chair last year.

Derek Tang, an economist at Monetary Policy Analytics, stated that past Fed chairs have relied on "a very strong vice chair" to help them clarify their personal policy ideas and foster consensus within the committee.

He believes that for Walsh, "this path indeed seems to have narrowed."

However, even without new board members, Walsh still has room to influence the Fed's operations. As Fed Chair, he can set the agenda for board meetings and influence the arrangements of senior Fed staff.

In the first five months of his tenure, Walsh has already shortened the duration of press conferences and announced plans to reduce the number of meetings to set interest rates starting next year.

Timiraos wrote that in the areas of bank regulation and payment systems, relevant decisions are made solely by the Fed board. The direct impact of the Democrats controlling the Senate on these policies may be relatively limited, as the board rarely passes significant regulatory rules by a narrow margin of 4 to 3.

However, if Trump cannot appoint a fourth board member, initiatives like Bowman’s push to relax capital requirements for large banks and open the Fed's payment system to non-bank entities may require support from a Democrat-appointed board member to pass.

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

In April of this year, Powell explained why he chose to remain on the board after his term as chair ended, acknowledging that this decision was unusual. He expressed hope that the Fed could "return to a state of respecting legal provisions and established practices, allowing the Fed to act according to its responsibilities."