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Here’s what it really means for Trump to get control of the Federal Reserve board

by TheAdviserMagazine
2 months ago
in Markets
Reading Time: 6 mins read
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Here’s what it really means for Trump to get control of the Federal Reserve board
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US President Donald Trump speaks during a meeting with Ukrainian President Volodymyr Zelenskyy and European leaders in the East Room of the White House in Washington, DC, on August 18, 2025.

Andrew Caballero-Reynolds | AFP | Getty Images

President Donald Trump’s effort to sack Federal Reserve Governor Lisa Cook is about more than firing someone: It’s a maneuver that, if successful, would mark a seismic shift for an institution that for ages had been considered above politics.

Since taking office in January, Trump has placed the Fed directly in the crosshairs of executive power. He has berated central bankers for not lowering rates, threatened to remove Chair Jerome Powell, and now has taken the unprecedented step of actually attempting to unseat Cook.

From the president’s perspective, he’s looking to reform what has been an unpopular institution, often blamed for the runaway inflation that hit the U.S. following the Covid pandemic. Trump sees lower interest rates as a pathway to manage the swelling federal debt while boosting a housing market that has been a counterweight to an otherwise growing economy.

However, legal scholars as well as financial market experts and present and former Fed officials say Trump’s moves not only threaten to make the Fed more political but also would undermine key pillars of the American financial system.

“We are on a road that is going to lead to the erosion of central bank independence,” said Kathryn Judge, a professor at Columbia Law School. “It would be incredibly costly for the long-term health of the economy for the Fed to lose the credibility that it has spent decades trying to build.”

Independence in the Fed’s case is a term used to describe its freedom from outside political influence to determine monetary policy that is best for the U.S. economy. This is particularly the case if those decisions are unpopular, such as when the Federal Open Market Committee raises interest rates to bring down inflation.

But there’s more at stake than simply the level of the three rates the Fed controls.

What the board controls, and what it doesn’t

Should Trump get a majority of members on the board of governors to vote the way he wants — and the evidence right now, to be sure, is scant that he can ever achieve such a goal — it would give him access to key levers that control the economy as well as the nation’s financial infrastructure.

The seven-member Board of Governors, for instance, has regulatory and enforcement power over banks.

Moreover, while the 12-member FOMC sets the key overnight funds interest rate, the governors alone establish the discount rate, used to find the present value of money, and the interest on reserve balances, which pays banks for storing their money at the Fed and also serves as a kind of guardrail for the funds rate.

Finally, the board has control over the reappointments of the 12 regional bank presidents, with a slew of names coming up in 2026.

Embedded within those responsibilities is the Fed’s role in ensuring the integrity of the Treasury system and preserving a stable dollar.

In other words, this is about more than just getting a rate cut in September.

“The most serious danger, I think, to people’s being able to have confidence in the Fed board is what Trump is himself doing,” said Robert Hockett, a professor at Cornell Law School. “Because if Trump succeeds with this, then it suggests the Fed board is nothing but a rubber stamp. It just basically tells us that any nutjob who happens to get into the White House will be setting monetary policy henceforth.”

The effect, Hockett added, is that “we can have the same kind of hyperinflations in the future that banana republics in Latin America have classically had when their dictators have set monetary policy, or that Turkey has experienced in recent years because its dictator has set monetary policy.”

What Trump wants to achieve

For the administration’s part, Trump’s lieutenants largely say they believe in Fed independence but see the central bank as institution run amok that needs reigning in.

However, the president has conceded he will litmus test nominees for board vacancies on their willingness to lower rates, and he in the past has advocated getting a say in the Fed’s rate decisions among other measures that might be considered intrusions into the central bank’s space.

“I don’t think it’s an undermining of Fed independence. I just think it’s the fact the system needs a wholesale reevaluation and President Trump just does things unconventionally,” said Joseph LaVorgna, a senior economist during the first Trump term and now counselor to Treasury Secretary Scott Bessent. “There definitely has been mission creep on behalf of the Fed getting into climate change and issues of diversity and inclusion and things that certainly go well beyond their mandate.”

In fact, the notion that the Fed needs an overhaul has support on Wall Street.

Mohamed El-Erian, the former Pimco executive and now chief economic advisor at Allianz, recently advocated that Powell step down as chair to avoid just the kind of battle over independence that is happening now. Moreover, he said the Fed’s own policy mistakes helped precipitate the current battle.

“This is the exact world that I was worried about,” El-Erian said Friday on CNBC. “The Fed is vulnerable on so many different fronts, and I fear now that we’ve started going down this road that I really dread.”

Among the reforms El-Erian spoke of included taking after the Bank of England and allowing “external members” onto its policymaking group “that bring a difference perspective and that help reduce the risk of groupthink.”

Also, he said the Fed should reconsider its 2% inflation target, something that Powell repeatedly has said is not on the table.

The end game

However, critics say that what Trump is talking about goes beyond mere structural reforms.

“This is really a story about trying to undo what had been 90 years of Fed independence,” former Fed Vice Chair Roger Ferguson said on CNBC. “The whole goal was to give the Fed independence in doing this very important thing, which is setting monetary policy. And now, for the first time, we’re seeing a direct effort to undermine that.”

How successful Trump will be in doing so is another matter.

Trump's making a direct effort to undermine the Fed's independence, says Roger Ferguson

Currently, he has two appointees, Christopher Waller and Michelle Bowman, on the board. Stephen Miran is awaiting Senate confirmation to fill the seat vacated by Adriana Kugler’s resignation. Should Powell leave next May when his term as chair runs out, that would create another vacancy and give the president five seats.

However, counting on all those members as automatic votes is risky.

Both Waller and Bowman have shown strong independent streaks, taking both out-of-consensus hawkish and dovish positions depending on circumstances, and are unlikely to be “little apparatchiks for Trump,” the Cornell professor Hockett said.

“It’s unfair to the sitting governors to assume that they’re willing to operate as partisan hacks,” added Judge, the Columbia professor.

Also potentially standing in the way is a series of court tests that will focus on whether Trump has “cause” to remove Cook or anyone else.

If the president succeeds, it could have wide-ranging effects on the economy and markets, said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

“We think the baseline case at this point should be that there is very substantial Trumpification of the Fed through 2026 and – while this does not automatically correspond to a big lurch in policy and practice – we need to very seriously consider the likelihood that this leads to a rupture with past practice and a materially different reaction function with important implications for markets,” Guha said in a recent note.

The stakes also are high for the Fed’s future as an institution.

“There’s never been as dire a threat to Fed independence in our entire history as a republic as there is right now thanks to what Trump is doing,” Hockett said. “I do think that long term confidence in our central bank and hence in our currency will take yet another hit.”



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