Let the Federal Reserve Board Choose Their Own Chair

Unpacking the independence of the Fed

The Federal Reserve System (Fed), established in 1913, was designed to operate independently of the federal government. The Fed is overseen by a seven-member Board of Governors who are appointed by the President of the United States and confirmed by the Senate for 14-year terms. The terms are staggered so that one Governor’s term expires every two years. Once their terms expire, Board members cannot be reappointed (although if they were appointed to a partial term because their predecessor left early, they could be).

The system was designed this way so that presidents would be limited in their power to fill the Board with their appointees, insulating it from political pressures.

The Board is headed by a Chairperson who the President appoints from among the seven members of the Board for a four-year term as Chair. Should the President decide to appoint someone else as Chair, the former Chair would retain his or her position on the Board, even if replaced as Chair.

The Chair’s presidential appointment compromises the Fed’s independence because should the Chairperson act in ways that displease the President, the President can replace the Chair. Jerome Powell, who President Trump appointed, had to cooperate with Trump’s agenda or risk being replaced. Now, he has that same incentive to support President Biden’s agenda.

I suspect this played a role in Powell’s agreeing with the Biden administration in 2021 that the uptick in inflation was transitory and nothing to be concerned about. The Fed employs an army of very bright economists who surely must have warned Powell behind closed doors about the inflationary threat at the time. Still, Powell continued with the transitory line until it was obvious to everyone that was not the case.

My conjecture is that the agreement of Powell and others at the Fed with the administration line of transitory inflation was politically motivated and that they likely knew better but would not say so. As I have suggested before, the actual route Powell and the Fed took to fight inflation seems like the politically smart move if Powell wants to remain as Chair, even though they moved late if their goal was to prevent inflation.

One way to reduce the political accountability of the Fed would be to have the Federal Reserve Board members choose their own Chair rather than have the Chair appointed by the President. The President has never had the power to remove members from the Board (except “for cause”), strengthening the Fed’s independence. Still, that independence is compromised because the President can replace the Chair.

The Fed’s primary responsibility is to control the money supply to prevent inflation. It’s ability to do so is compromised because the Board Chair is subject to presidential reappointment. The remedy is straightforward: give the Board the power to choose its own Chair from among its members.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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