Introduction to the Federal Reserve Drama
The Justice Department’s investigation into Federal Reserve Chair Jerome Powell has brought attention to a key drama that will play out at the central bank in the coming months. Powell’s term as Fed chair finishes on May 15, but he has a separate term as one of seven members of its governing board that lasts until January 31, 2028.
Historical Precedent
Historically, nearly all Fed chairs have stepped down from the board when they are no longer chair. However, Powell could be the first in nearly 50 years to stay on as a governor. Many Fed-watchers believe that the criminal investigation into Powell’s testimony about cost overruns for Fed building renovations was intended to intimidate him out of taking that step.
Implications of Powell’s Decision
If Powell stays on the board, it would deny the White House a chance to gain a majority, undercutting the Trump administration’s efforts to seize greater control over what has for decades been an institution largely insulated from day-to-day politics. David Wilcox, a former top economist at the Fed, said, "I find it very difficult to see Powell leaving before midnight on Jan. 31, 2028. This is a mortal threat to the governance structure of the Fed as we’ve known it for 90 years."
Trump’s Efforts to Replace Powell
Trump has sought to push out Powell before his time is up, obsessively attacking him for not cutting rates as sharply as the president wants. Trump said Tuesday that he hopes to name a new Fed chair in the next few weeks. However, the criminal investigation of Powell could get in the way of that plan.
Potential Consequences of Trump’s Actions
If Trump nominates a new chair, but Powell stays on as a governor, the new chair would have limited power to influence the Fed’s decisions. Powell, along with other members of the Fed’s 19-member interest-rate setting committee, could outvote the new chair. This would limit Trump’s ability to control the Fed and implement his economic policies.
Historical Examples
There is some precedent for Powell to stay on the board. In 1978, then-Chair Arthur Burns stayed on the board for about three weeks after his chairmanship ended. In 1948, then-Fed chairman Marriner Eccles remained as a governor for three years after finishing as chair. Eccles played a key role in establishing the modern Fed as a largely independent institution.
Conclusion
The drama surrounding Powell’s potential decision to stay on the Fed’s board has significant implications for the future of the central bank and the economy. If Powell stays, it could limit Trump’s ability to control the Fed and implement his economic policies. Ultimately, the outcome will depend on Powell’s decision and the actions of the Trump administration. As the situation unfolds, it will be important to watch how the Fed’s independence is affected and what consequences this has for the economy.
