Will the Federal Reserve's "genes" change? Deeper reform signals than changing the chairperson
The Federal Reserve may face a comprehensive review, as Treasury Secretary Becerra stated that it is necessary to assess whether its operations are successful, especially in the absence of significant inflation. His remarks may pressure the Federal Reserve to accelerate interest rate cuts or formally review its mechanisms. Although there have been frequent reports of Trump attempting to dismiss Powell, the impact of changing the operational logic of the Federal Reserve could be more profound. The role of the Federal Reserve Chair is important, but its policy-making structure is designed to prevent political interference, and changes require congressional approval, making the process lengthy
Changing the way the Federal Reserve operates or assesses the economy may have a more lasting impact on policy and markets than firing the Federal Reserve Chairman. According to the Zhitong Finance APP, U.S. Treasury Secretary Becerra stated on Monday that the Federal Reserve as an institution needs a comprehensive review to assess whether it is operating successfully. Becerra claimed that the Federal Reserve "created panic over tariff issues" without significant signs of inflation, which is sufficient reason for a comprehensive review of its operations. He stated, "What we need to do is examine the entire Federal Reserve institution and whether they have successfully fulfilled their responsibilities. There are a bunch of PhDs over there, and I don't even know what they are doing."
It is unclear whether Becerra's remarks were merely intended to apply more pressure on the Federal Reserve to accelerate the interest rate cut process (as Trump has been demanding almost daily) or if the U.S. government indeed intends to conduct a formal review of the Federal Reserve's operations, analysis, and execution mechanisms. Despite rampant speculation in recent weeks about Trump's attempts to fire Powell, the latest developments—potentially changing the operational logic of the Federal Reserve—could have far-reaching effects beyond merely ending a chairman's term early.
There is no doubt that the role of the Federal Reserve Chairman is very important. A politically motivated dismissal would severely challenge the independence of the Federal Reserve. However, ultimately, the Federal Reserve Chairman is just one member of the Federal Open Market Committee (FOMC), and the policy-making structure of the Federal Reserve is partly designed to prevent excessive political interference.
The FOMC, responsible for policy-making, consists of seven Federal Reserve governors and five regional Federal Reserve bank presidents. The chairman and vice chairman of the FOMC are elected by the committee at the beginning of each year. While it is customary for the Federal Reserve Chairman to serve as the FOMC chairman, this is merely a convention and not a requirement. If a majority of FOMC members oppose a politically charged candidate, they could theoretically vote to elect another FOMC chairman as a form of protest.
Changing the institutional structure of the Federal Reserve requires Congressional approval, a process that could be quite lengthy, as many Republicans (including staunch supporters of Trump) are cautious about intervening in the Federal Reserve. Additionally, a recent Supreme Court ruling also suggested that the structure of the Federal Reserve should remain unchanged due to its "special historical status."
Tim Duy of SGH Macro Advisors believes that to fundamentally change the direction of the Federal Reserve, the White House would need more FOMC seats to create sufficient voting power. The two greenish governors appointed by Trump—Christopher Waller and Michelle Bowman—have publicly called for immediate interest rate cuts, and with two governor positions potentially becoming vacant in the next year (including Powell's position), it could allow Trump-nominated members to hold a majority on the board.
However, influencing the Federal Reserve's way of thinking, forecasting models, and operational methods is another matter. If Trump's team cannot gain more seats on the FOMC, they can only attempt to change the "genes" of the Federal Reserve, and a significant review that reshapes the framework of thinking, forecasting patterns, and external communication could have profound long-term effects.
Kevin Warsh, a former Federal Reserve governor who is currently viewed as a leading candidate for the next Federal Reserve Chairman, is indeed critical of traditional Federal Reserve analysis He does not agree with the current depiction of the "trade-off between employment and inflation," and claims that if the balance sheet policy tightens further, there is still room for interest rates to decline.
Of course, if the market believes that a rate cut is inappropriate now, inflation expectations may rise due to concerns about political intervention, and long-term borrowing rates will also increase accordingly. However, reality may not be so clear-cut. Tim Duy stated, "The goal of the Trump administration seems to be to maintain a low interest rate policy while concentrating the issuance of U.S. Treasury bonds at the front end of the yield curve." "While extremely loose policies are expected to push up long-term rates, it does not rule out the possibility of the Federal Reserve and the Treasury working together to achieve debt management goals by focusing on controlling the yield curve."
