Why the Federal Reserve has historically remained independent of the White House

The US Federal Reserve holds sweeping influence over the world's largest economy. 

By lowering its benchmark short-term interest rate, the central bank can spur borrowing and spending, while raising rates typically slows growth and hiring in order to tame inflation.

Economists generally favour independent central banks, arguing they are better able to take unpopular steps such as rate hikes without political interference, reports the Associated Press. 

The importance of that independence was underscored during the 1970s, when then-Fed Chair Arthur Burns, under pressure from President Richard Nixon, kept rates low ahead of the 1972 election. 

Inflation surged, setting the stage for painful years of price increases.

That changed under Paul Volcker, appointed in 1979 by President Jimmy Carter. Volcker raised the Fed's key rate to nearly 20%, unleashing a deep recession and protests as unemployment neared 11%. 

By the mid-1980s, inflation had fallen back to low single digits, cementing Volcker's legacy as an example of why the Fed must be able to act without political pressure.

Markets on edge

Any move to fire Fed Chair Jerome Powell before his term ends in 2026 would likely roil financial markets, sending stock prices lower and bond yields higher, which would in turn raise borrowing costs for households and businesses, says the Associated Press. 

Investors value an independent Fed not only for its track record on inflation but also for its predictability.

"If politics dictated policy, markets would have a harder time anticipating or understanding Fed decisions," said one analyst.

The 10-year Treasury yield, a benchmark for mortgages, is closely tied to expectations of Fed policy. A politically driven shake-up could fuel volatility across asset classes.

Checks and balances

The Fed is not free of oversight. Its seven governors, including the chair, are presidential appointees confirmed by the Senate. 

They serve staggered terms of up to 14 years, allowing a president to gradually reshape policy direction.

President Joe Biden appointed four current governors, including Powell, Lisa Cook, Philip Jefferson and Michael Barr. 

His fifth pick, Adriana Kugler, resigned this month. Former President Donald Trump has nominated economist Stephen Miran to replace her, subject to Senate confirmation.

Powell's term as chair runs until May 2026, though he remains a Fed governor until 2028 unless he resigns or is removed. 

Even then, policy decisions are made by the 12-member Federal Open Market Committee, meaning a new chair would not automatically dictate outcomes.

Congress also sets the Fed's statutory goals, says Associated Press.

In 1977 it gave the central bank a "dual mandate" to pursue maximum employment and stable prices, which the Fed defines as 2% inflation. 

The Fed chair must testify twice a year before lawmakers on economic conditions and policy.

Legal questions

Whether a president can fire a Fed chair early remains unsettled. 

The Supreme Court has suggested a removal must be "for cause," generally interpreted as misconduct or negligence, rather than policy disagreements.

Trump allies have scrutinised the central bank's ongoing headquarters renovation, seeing it as a potential pretext to remove Powell. 

Any such move would almost certainly be challenged in court, potentially reaching the Supreme Court.