The power of the federal reserve: the congress gives and the congress can take away

While President Donald Trump fell to previous suggestions that he dismissed the president of the Fed, Jerome Powell, he continues to demand lower interest rates.

The surprise announcement Friday that Governor Adriana Kugler will move next week, well before his departure scheduled for January, when his mandate to the Governors Expire, gives Trump a start to choose the replacement of Powell.

The president has already declared that he would name a new chair that would reduce the prices. It is despite the continuous resistance of Powell and most other political decision -makers to maintain stable rates as Trump’s prices make their way through the economy and exert upward pressure on inflation.

In the middle of the dead end between the White House and the Fed, the Congress has the power to modify the authority and the mission of the Central Bank.

Wharton finance professor Jeremy Siegel said this potential last month, when he told CNBC that Powell may need to resign in order to preserve the Fed’s long -term independence.

His reasoning: if the economy stumbles, then Trump can indicate Powell as the “perfect scapegoat” and ask the congress to give it more power on the Fed.

“This is a threat. Do not forget, our federal reserve is not at all a part of our Constitution. It is a creature of the American Congress, created by the Federal Reserve Act 1913. All its powers are devoted to Congress,” said Siegel. “The congress has modified the law on the federal reserve several times. It could do it again. This could give powers. It could take powers. ”

In fact, Siegel fears can be carried out. The economy enlightened sudden warning signs, especially the shocking Friday report which showed that payroll gains were much lower than you thought before.

JPMorgan economists have even warned that the report is blinking a recession alert because it suggests a sharp drop in business labor demand.

Modify the double mandate of the Fed

The lever effect of the Congress on the Fed is not lost for the legislators. To one Axios The event last week, Senator Bernie Moreno, R-Ohio, was invited to know if the Federal Reserve Act should be changed or updated.

“There are a lot of things we should talk about,” he replied. “For example, should the federal reserve pay interest rates for banks for their night deposits? I think it is a legitimate question that we have to examine a little more.”

In addition to paying the interests of American banks on their reserves, he stressed that the Fed pays foreign banks to have money in America, adding “I don’t know it’s a good plan. Maybe it must be lowered. ”

Moreno also pointed out the FED double mandate for full employment and price stability, which was created in 1977 when the congress changed the Federal Reserve Act.

He said the Congress should examine another look at the Fed’s mission, suggesting that the mandate should be changed to target maximum employment “as high as possible”.

As for the other element of the double mandate, Moreno also said: “We must make sure that we understand what they are looking at with regard to inflation”.

For example, he noted Powell’s failure to increase rates earlier during the pandemic, when there was a supply shock and a peak of demand from the whole stimulus. He also underlined Powell’s current reluctance to reduce rates despite any indication, but that prices have caused a sharp increase in inflation and while taxes are down.

“So it’s:” How do you analyze this? “” Explained Moreno. “And I think he looks at a very political goal. He should look at a very apolitical goal.”

For his part, he also said Axios Earlier in the conversation he believes “absolutely” in the independence of the central bank, but added that Powell could be legitimately dismissed to be “extraordinarily incompetent”.

Independence nourished

Of course, the Fed is not completely devoid of political influence. The president appoints and the Senate confirms the members of the Council of Governors, including the President and Vice-President. The president of the Fed must also testify regularly before the congress and is burned by the legislators.

At the same time, the Fed was structured to be somewhat isolated from political pressures. Governors have 14 -year -old mandates who expire in a timely programmed, preventing a single president from completely reorganizing the board of directors at the same time.

Governors cannot be deleted either for political disagreements and can only be ousted “for good”, which has been interpreted as neglecting duty or embezzlement.

The regional presidents of the Fed are also not appointed politically appointed, and the Fed finances its own operations without credits of the legislators.

This is why Fed Independence is a delicate concept, said Michael Pugliese, principal economist at Wells Fargo, FortuneBecause it largely derives from a mixture of laws, standards, informal agreements and traditions.

“It is not as if there was an independence clause,” he said. “It is more than the structure itself is constructed a little independent of the political system.”

Pugliese thinks that it is very improbable that the congress will modify the law of the federal reserve to allow a more explicit influence of the White House.

This is because the Democrats would not be, and the Republicans would probably not get rid of the ribbibry rule in the Senate to immediately erode the independence of the Fed, he said.

“Getting rid of the Flibustier would probably open the door to tons, tons and tons of other political discussions on many different questions, not only at the Federal Reserve Act.” Pugliese explained. “The filibuster remained as long as it did because the two parties had reasons and did not change it. And maybe it changes one day, but I would be very surprised if the thing that changed was the Fed.”