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Aaaand there it is:
The Trump administration is reviewing options for exerting more influence over the Federal Reserve’s 12 regional banks that would potentially extend its reach beyond personnel appointments in Washington, according to people familiar with the matter.
We speculated yesterday that this could be one of the goals of the Trump administration’s attempt at firing Lisa Cook, one of the Federal Reserve’s governors. If it wants to seize control of the US central bank and slash interest rates then it would probably have to find a way to browbeat the heads of the regional Feds, or to replace them with someone more amenable to the president’s wishes.
That’s because interest rates are set by the full Federal Open Market Committee — or FOMC. This consists of the seven-member Board of Governors in Washington, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year FOMC terms on a rotating basis.
Therefore, even if president Trump replaced Powell with a stooge willing to vote for aggressive interest rate cuts, the new Fed chair might easily find themselves outvoted by the rest of the FOMC. In fact, even with Stephen Miran and a replacement for Lisa Cook on the board of governors, the Trump appointees would still be outnumbered in the full interest rate setting committee.
This is one of the main reasons why investors have for the most part remained sanguine over the prospect of president Trump replacing Powell with one of his courtiers. After all, why sweat it if they’re going to be boxed in by a bunch of stolid, dependable mainstream economists anyway?
But investors are probably underestimating the White House’s determination to take over the Fed, and Cook’s defenestration opens up an avenue to do so.
With control of the Federal Reserve board — which Trump appointees would in theory have if Cook is successfully ousted — they could use its dormant powers to reshape the theoretically independent regional Feds.
Although the heads of the regional Feds — based in Cleveland, Minneapolis, Dallas, Philadelphia, Kansas City, St Louis, Boston, Atlanta, Richmond, San Francisco and Chicago — are selected by local power brokers, they have to be approved every five years by the seven-member Board of Governors.
And every single one of the dozen regional presidents are due for re-approval this February.
This has historically been a rubber stamp process. In fact, there’s never been a case of the Fed board vetoing a president selected by the local board. But Bloomberg reports that the regional Fed heads became understandably antsy after Trump said he would fire Cook:
Several of the Fed’s regional presidents began to grow concerned earlier this summer about what Trump’s plans for the central bank could mean for their jobs, according to people familiar with the matter. The president’s announcement late Monday exacerbated those concerns, with presidents making a round of calls to each other about what Cook’s firing could mean for them, according to one person familiar with the matter.
The question is whether the likes of Fed governor Christopher Waller would go along with a purge, even if he is a Trump appointee and is angling to succeed Powell.
Nor can the Trump administration or a Trump-controlled Fed board dictate who the local regional Fed boards nominate as their heads even if they are able to stymie the reappointment of the existing ones.
The Federal Reserve Act of 1913 stipulates that two sets of directors of a regional Fed — Class B and C, who shouldn’t be directly affiliated with a supervised bank — form a search committee to find a shortlist of candidates. Class A directors are usually representatives of local banks, and therefore are prohibited from being involved in regulatory issues or the appointment of presidents.
For example, Nasdaq’s CEO Adena Friedman and The Rockefeller Foundation’s president Rajiv Shah are respectively B and C directors of the New York Fed, while René Jones, the CEO of M&T Bank Corp, is a Class A director. Here you can see the make-up of the Atlanta Fed and Chicago Fed boards.
This is all supposed to safeguard the independence of the regional Feds and prevent the board in Washington from gaining too much power. However . . .
It would be naive to think that regional Fed directors would select a new president unlikely to be approved by the Fed board in Washington. While no president has ever been vetoed, there are signs the process has become more political, with Waller and fellow Trump appointee Michelle Bowman abstaining from voting for Austan Goolsbee when he was nominated for president of the Chicago Fed — the first time that’s ever happened, we think.
Moreover, Class C directors are appointed by the Federal Reserve Board in DC, and in many districts the businesspeople that form the bulk of Class B directors could be very susceptible to pressure from the Trump administration to nominate people that align fully with the president’s goals. So if the White House really wants to go down this route then it has some options.
Here is the Trump administration’s own spin on things to Bloomberg:
A person familiar with the matter said the administration’s goal isn’t to make the central bank more dovish, but to scrutinize how regional presidents are vetted and chosen since they are not Senate-confirmed.
