July seventeenth, twenty twenty-five
《Can the Fed Maintain its Independence&FOMC101》
《From Money to Politics: An Introduction to the White House, the Fed, and the FOMC System》
After the pandemic, Robert L. Hetzel published an updated edition of his history of Federal Reserve monetary policy, The Federal Reserve: a new history. In it, the sixth section of Chapter Twenty-Five is titled “Can the Fed Maintain its Independence” as its title,
It contains the following passage:
...Mr. Greenspan has said that this could happen again. So the question is—If this intervention was important enough to warrant your stepping in, how can we trust your judgment to simply stand by, wait, and rely entirely on your discretion to handle the next similar event?
Your intervention benefited those who had made mistakes...One result was that some of the wealthiest people in the country ended up better off than they would have been without federal government intervention—and that has made many people angry...because when we asked whether something similar could be done for those who needed more help, we were told that nothing could be done...I am disappointed that you are asking us only to accept that this will keep happening in the future.
Because The allocation of credit inherently creates losses and windfall gains, and involvement in credit policy inevitably draws the Fed into the political arena.To preserve its independence, the Fed must return to its sole responsibility—monetary policy.The pandemic greatly expanded the government’s role in the economy. And by taking the leading role in allocating credit in private credit markets, the Fed is effectively accelerating the expansion of state power.If the political system gradually comes to expect the Federal Reserve to allocate credit resources to certain “favored groups,” then this COVID crisis will become the turning point in America’s permanent departure from the free-market system.
Photo: I checked the bookshelf, and it seems only the first edition has been translated; the second edition is currently available only in the English original.
In fact, the Fed’s actions after the pandemic brought the question of its independence squarely before everyone, whatever the intentions, the results are clear and indisputable, the Fed has indeed inevitably become increasingly involved in the political arena.
Figure: Notes250407 “Powell and Yellen’s Tricks”
A fundamental paradox is that the more proactive the Fed’s actions are, and the more it seeks to stabilize markets and guide recovery, the more strongly it will inevitably participate in allocating credit resources. That allocation has nothing to do with whether it is close to the White House or obedient to the president.
I was sick yesterday, and when I woke up, I saw the farce of Powell going from being “fired” to Trump “clarifying” things:
Reports say Trump discussed whether Federal Reserve Chair Powell should be removed during a meeting with House Republicans earlier this week and had drafted a letter to that effect. The New York Times cited sources saying the letter was ready, but when speaking to the media today, Trump said he had indeed discussed “the concept of firing him,” but had not drafted a letter and had “no actual intention” of doing so at present.
When a reporter asked whether he ruled out the possibility of firing him entirely, the president said: “I don’t rule anything out, but I think it’s highly unlikely.”
The New York Times noted that the renovation project may be used as a pretext to “find an excuse” to fire Powell.Under Section 10 of the Federal Reserve Act, the president may remove members of the Board for “cause.” “Cause” is generally understood to mean neglect of duty, negligence, or misconduct, rather than policy disagreements.
Law does not clearly specify whether “cause” applies to the chair position. This renovation project was first mentioned in Powell’s semiannual testimony to Congress in 6. At the time, Senator Scott of South Carolina called the renovations “luxury upgrades, as if it were the Palace of Versailles.” Asked this week whether the renovation constituted grounds for removal, the president replied, “I think it sort of does.” News also emerged this week that Powell had requested a further review of the renovation project by the Fed’s inspector general.
Figure: My first thought on seeing the news
My first reaction to this news is that some people seem overly eager; the market clearly has not yet reached the stage of pricing this in. After all, the market had already expected the Fed and Powell himself to face greater political pressure under the new administration, and this has been repeatedly discussed and fully digested since the middle of last year.
Over the past few months, comments from Trump, members of the administration, and potential candidates to succeed the Fed chair have continued to accumulate. They have ranged from calls for FOMC to cut rates as soon as possible to criticism beyond the scope of policy, focused on Powell’s handling of the 25-billion-dollar renovation of the Fed headquarters, and used to demand his resignation.Although these voices are growing louder, they remain largely within the framework of what the market had already expected. They are disruptive, but nowhere near enough to change risk pricing; they really are not worth much attention yet.
Market prices show that stocks, bonds, and currencies did indeed quickly settle down within an hour of the news breaking.In retrospect, this event left almost no trace in prices. It would have had no impact on some traders who were away from the news or on systematic strategies that read only closing prices.In any case, despite the president’s appointment powers, Board members still enjoy institutional safeguards for their independence—especially the chair, who certainly has far stronger protections than those of an ordinary independent agency.
This protection is also supported by legal precedent:
If the president actually tries to fire Powell, the judicial system will inevitably become involved.If the president takes action, judicial rulings will likely be a key factor in clarifying the scope of “cause.”
The Federal Reserve Act provides that governors may be removed only “for cause”—a phrase historically understood to mean serious misconduct or dereliction of duty, not policy disagreements. In 1935, in Humphrey’s Executor v. United States, the Supreme Court unanimously ruled that the president may not remove members of independent agencies protected by a “for cause” provision because of political disagreements.
But in 5 of this year, in Trump v. Wilcox, the Supreme Court ruled that the president could remove members of the National Labor Relations Board, seemingly departing from the precedent in Humphrey’s Executor.allowing the president to proceed with personnel changes before the appeal is decided, but this ruling specifically noted that the Federal Reserve Board was not within the scope of “removable” officials covered by this decision. This was included in the majority opinion and emphasized in Justice Kagan’s dissent as a “rare carve-out.”
The majority wrote: “Finally, respondents Gwynne Wilcox and Cathy Harris argue that the dispute in this case necessarily implicates the constitutionality of ‘for-cause removal protections’ for members of the Federal Reserve Board or other members of the Federal Open Market Committee (FOMC).We disagree. The Federal Reserve is a uniquely structured, quasi-private entity that carries on the historical tradition of the First and Second Banks of the United States.
Overall, in the 5 case Seila Law, The Supreme Court strengthened the president’s power to remove executive-branch officials, weakening the precedent established in 1935 by Humphrey’s Executor (Humphrey’s Executor, 1935), which held that the president could not arbitrarily remove the heads of independent agencies. The Court reasoned that the president should have more direct personnel control over certain agencies.
But for that very reason, the Supreme Court may choose to limit the extension of this removal power to the Fed and deliberately preserve a “narrow exception”, a political tradition the United States has preserved since the Declaration of Independence. From a financial perspective, the question of the Fed’s independence concerns the dollar and monetary policy; more broadly, it concerns the fundamental logic of the U.S. political power system.
In fact, bank regulation does often change when administrations change. For example, positions such as Treasury secretary and regulatory officials typically turn over after elections, allowing these agencies’ policy direction to shift with presidential preferences, But the Fed’s monetary policy mandate should remain relatively independent and stable. The Federal Reserve Act was not designed to make monetary policy change politically from one administration to another. This is one of the legal foundations of the Fed’s independence.
This means the Supreme Court likewise recognizes that monetary policy cycles and government terms in office should not naturally align, because the independence of monetary policy should not fluctuate with party turnover as bank regulation or fiscal functions do.
On this point, we also made a successful prediction in last year’s Notes:
Figure: After we published our view, Vice Chair Barr did indeed step down as Vice Chair for Supervision
Justice Kagan also made this point in her dissent. She wrote:
“In the context of emergency relief, by extolling so highly the president’s power to remove Wilcox, Harris, and similar officials without cause, the majority has come close to treating Humphrey’s Executor itself as an ‘emergency.’The Fed is clearly excluded.At the end of today’s ruling, the majority suddenly stated, This case has nothing to do with the constitutionality of the for-cause removal protections for members of the Federal Reserve Board or the Federal Open Market Committee. I am relieved by that, and I believe the majority genuinely intends to avoid threatening the Fed.”
The short-term incentives created by election cycles may prompt policymakers to stimulate the economy at the wrong time, at the expense of long-term stability. Global experience shows that central banks subject to less political interference often achieve lower and more stable inflation.From the perspective of U.S. history, monetary policy errors from the end of the 1960s to the beginning of the 1970s were closely linked to political interference, with far-reaching consequences.
If the Fed’s independence is weakened, it will further intensify upside risks along an inflation path that is already under pressure, especially amid rising tariffs and elevated inflation expectations, Market participants may demand greater inflation compensation, pushing up long-term interest rates, weighing on economic expectations, and worsening fiscal conditions.
For more on this: Notes250714 “Bonds, Budgets, and the Search for Value”
Chart: This Notes post has a poor title; it should really be called “Global Markets Under Fiscal Dominance.” The current title is holding down its click-through rate a bit, but everyone really should read the content. It is a major source of the fundamental logic behind many of our views on assets.
Ultimately, for us, What is the actual point in time when volatility hits? That is the real key question beyond the interpretation.
After all, Ideas only have monetary value when they are put into actual trades:
At this point, the market expects the formal process for nominating the next Fed chair to begin with a nomination to fill the Board seat whose term expires when Kugler’s ends on 2026 1 31. Bessent added that the timing of the nomination will be decided by the president. By past practice, a Fed chair nominee is usually announced three to four months before the incumbent’s term expires, so the current debate is clearly happening ahead of schedule.
Chart: Personnel changes at the Fed will really begin with Kugler.
If the Trump administration ultimately appoints the next chair to the Board seat opened by Kugler’s term expiring, then whether the administration can further expand its influence on the monetary policy committee will also depend on whether Powell chooses to remain a governor after stepping down as chair. It is worth noting that, Powell’s term as chair ends on 2026 5 15, but his term as a governor continues until 2028 1 31 During Trump’s potential next term, The terms of the remaining Board seats will not have expired.
Powell himself has been vague about whether he will remain a governor after leaving the chair.
At the European Central Bank’s annual conference in Sintra, when asked whether he planned to remain a governor after stepping down as chair, Powell replied, “I have no comment on that today.” Although FOMC chairs usually leave the Board when their terms end, this is not required.One notable historical example is Marriner Eccles, who, after leaving the chair in 1948, He remained in office as a governor because he disagreed with the Treasury secretary during President Truman’s administration.
If Powell resigns or is removed, the long end of the bond market would most likely plunge, and the market would instinctively “shoot first and ask questions later,” because this could mean the United States is moving closer to “Turkish-style” monetary policy:This would mark a further move toward a centrally planned economy, beyond the United States’ industrial policy, sector strategies, semi-nationalization of rare earths, and direct intervention to pick winners and losers in the technology sector. This would trigger capital outflows and weigh on the dollar.
There is a chance this scenario will occur, but it is too unpredictable for the market to price it effectively at this point.
Finally, in the FOMC 101 section, let’s review the basic structure of the Fed and the Open Market Committee:
1) The Federal Reserve’s interest-rate policy is set by the Federal Open Market Committee (FOMC). FOMC, it has 12 members in total: 7 members of the Board of Governors based in Washington, the president of the Federal Reserve Bank of New York, and the presidents of the other 11 regional Federal Reserve Banks, among whom 4 are selected on a rotating basis.Governors are nominated by the president and confirmed by the Senate. Their terms are 14 years, with a new term beginning every two years and if appointed to fill an unexpired term, they may still be reappointed to a full term.
2）The chair and vice chair of the Board are nominated from among the governors, appointed by the president, and confirmed by the Senate Their term is 4 years, and they may be reappointed.
3) After leaving the chair or vice chair position, the person may continue to serve as a governor, but this has been extremely rare historically.The last time this happened was with Marriner Eccles in the 1940s (see above).
4) Note that the chair and vice chair of the FOMC are elected by its FOMC members, rather than directly appointed by the president. Historically, however, FOMC has always chosen the chair of the Federal Reserve Board to serve as FOMC chair. At both the Board and FOMC levels, The chair’s “formal powers” are not significantly greater than those of ordinary members; the chair’s influence stems mainly from the committee’s respect for and adherence to the chair’s historic position.
5) Regional Fed presidents are elected by the directors of each Reserve Bank, subject to approval by the Federal Reserve Board. All All 12 regional Fed presidents undergo a comprehensive eligibility review every 5 years, in 2 of years ending in “1” or “6”The next review will take place in 2 next year; usually this process The process is more form than substance.
6) On the president’s influence over FOMC:In normal times, the president mainly influences FOMC’s composition by appointing governors.As noted, even if Powell chooses to leave at the end of his term, the president’s influence over the Board’s composition during the remainder of the term would still be limited. Of course, given that many governors do not serve out their full 14-year terms, the president could have more opportunities to fill vacancies if patient.
In addition, The president can also exert influence indirectly. For example, by meeting with the Fed chair although this practice has become increasingly rare; the president can also exert public pressure by expressing policy views in public statements or on social media. As during Trump’s first term, despite the president’s frequent expression of policy preferences, the market generally believed the Fed continued to base its decisions on economic fundamentals and showed no signs of actually yielding.
For more on this: Notes241112 “How U.S. Presidents Influence Fed Decisions”
Chart: Notes241112 “How U.S. Presidents Influence Fed Decisions”
7) If the administration tries to remove Powell from the chair, the situation could become more complicated. The administration may be counting on a “demoted” Powell to leave the Fed entirely, as most former chairs have historically done. But as noted above, Powell can certainly choose to remain as an ordinary governor until 2028, continuing to take part in monetary policy decisions during the president’s final year in office.This would not only hinder the president from nominating a new governor, but could also lead FOMC to reelect Powell as FOMC chair, effectively preserving his policy leadership. As noted above, although the chair’s formal authority is limited, the chair has historically had significant influence over policy direction.
As usual, we have a fun image at the end. If it looks familiar, that proves you read the Notes from a few days ago carefully. If it looks unfamiliar, you need to catch up on the earlier material.
Chart: Survey of expectations for the next Fed chair among nearly 700 institutional clients of GS
A quick plug: we ask the traders on our own trading desk to produce a single-market note about every 2 days, covering U.S. stocks, A-shares, Hong Kong stocks, and commodities. We select the better ones to post in the corresponding private groups,
If you’re interested, subscribe as needed (only subscribe if you need it; don’t waste your money):
U.S. stocks:https://www.meridianresearch.app/home?product=us-strategies
A-shares and Hong Kong stocks:https://www.meridianresearch.app/home?product=asia-strategies
Commodities:https://www.meridianresearch.app/home?product=commodity-strategies
We’d like to know whether everyone likes this new format for Notes. If you think it is better, you can also leave a like to let us know. We’ll decide whether to continue with this kind of content or return to the previous column format based on the feedback we receive.
Wishing you all the best.
2025.07.17
Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.