After months of criticizing current Federal Reserve Chair Jerome Powell, President Donald Trump has finally chosen a successor for Powell's term, which ends in May. Assuming Congress confirms him, Kevin Warsh will become the new Fed chair. Warsh served on the Federal Reserve Board of Governors between 2006 and 2011, and has also spent many years working with the legendary investor Stanley Druckenmiller.
While Trump may think that his troubles with Powell are behind him, there is still one way that Powell could prove to be a thorn in Trump's side for the rest of his term.
The way Powell can retain his influence at the Fed
It's customary for the departing Fed chair to step down from the Fed's Board of Governors once their term as chair ends. However, Powell's term on the Fed board runs through 2028, so he could choose to stay on if he wanted to. This has occurred before. In the late 1940s, Marriner Eccles, the seventh chair of the Fed, remained on the Fed board because he believed his removal by President Harry Truman was politically motivated at the time.
Image source: Official White House photo by Daniel Torok.
Powell, who has expressed concern about Trump's meddling at the Fed, could decide to stay if he believes the Fed's independence is at risk. In fact, it's possible the U.S. Department of Justice subpoenaed Powell regarding a criminal investigation into a multibillion-dollar renovation of the Federal Reserve's new headquarters, in a move intended to discourage Powell from remaining on the Fed board. To remove a member of the Fed's Board of Governors, a president must have "cause."
Being on the Board of Governors is a powerful position. There are seven members, each of whom can serve a full term of 14 years. Furthermore, all seven members serve on the 12-member Federal Open Market Committee (FOMC), which controls the three main tools of monetary policy: open market operations, the discount rate (influences the federal funds rate), and reserve requirements.
This means that if Powell stays on as governor for the rest of his term, he will have a say on the trajectory of interest rates. That could prove to be a thorn in President Trump's side, who desperately seeks lower rates. While the FOMC has lowered rates under Powell's leadership on several occasions, Trump wants the Fed to move faster, and Powell will vote on rate decisions based on his interpretation of economic data.
Furthermore, Powell is a well-respected member of the Fed and could exert influence on other FOMC members.
Powell hasn't made a decision yet
Although Powell has been asked by the media repeatedly about whether he plans to stay on, the 73-year-old has been tight-lipped. At the end of January, The Wall Street Journal reported that U.S. Treasury Secretary Scott Bessent said he felt confident that Powell would step down once his term as chair ends. However, the Journal, citing anonymous sources, also reported that the DOJ subpoena made Powell reconsider.
Following the subpoena, Powell, who Trump nominated to become Fed chair in 2017, said he believed the investigation stemmed from the Fed refusing to meet Trump's demand to lower interest rates more quickly. Media outlets have reported that the Fed has sought to get the subpoenas rescinded. The DOJ's inquiry has also somewhat backfired on Trump because Sen. Thom Tillis (R-N.C.) has said he will not vote on any new Fed nominees until the DOJ finishes its investigation.
If Powell is concerned about the Fed's independence, which seems to be the case, he might not want to leave the board because it would allow the Trump administration to fill another vacancy. Now, Warsh is well-respected among the financial markets community, so I'm not saying he is going to follow Trump's every command.
However, it seems hard to believe that one can obtain a nomination from Trump to such a post without giving some assurances to the president. So Powell may view it as his duty to remain on the Board of Governors, thereby preventing Trump from filling another vacancy with a more amenable candidate and potentially limiting Trump's influence on the FOMC and, therefore, the trajectory of interest rates.
