Can Fed Governors be Fired?

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. Joining me today is Yelena Shulyatyeva, the senior economist at The Conference Board, and today we're going to talk about the US Federal Reserve. What is it? How does it work? How does it connect with the president, the administration, the Congress? And how do all these pieces connect? 

Joining me, Yelena. You're going to tell us all about the basics.  

Yelena Shulyatyeva: Glad to be here.  

Steve Odland: I know everybody knows a little bit about the Fed. Probably very few know a lot, certainly very few know as much as you know, and you are an expert at this. Let's just start with the basics though. What exactly is the Federal Reserve, when was it created, and so forth?  

Yelena Shulyatyeva: So the Federal Reserve is the US central bank. That is often referred to just simply as the Fed. And that was created by the Federal Reserve Act of 1913 to establishmonetary system that could respond effectively to stresses in the banking system. That was the key purpose at that time.  

Steve Odland: Yeah. And other countries have Federal Reserve banks or central banks. So this is very common wherever there is a currency, yeah?  

Yelena Shulyatyeva: Absolutely. So, we definitely have central banks in other countries. In Europe, it's ECB, European Central Bank, and other countries obviously have that, too. They conduct monetary policy based on what is good for their country. And this is the key purpose of the central bank.  

Steve Odland: The key purpose of the US Fed is twofold, right? Describe both of those objectives.  

Yelena Shulyatyeva: Well, you are referring to monetary policy, part of the Federal Reserve mandate. It's the dual mandate of price, stability, and full employment. But the Central Bank goals, the Central Bank purpose is slightly broader than that. We are all very familiar with monetary policy, but it's just one thing out of five purposes of the central bank. 

So, the central bank also makes sure that we have financial stability. It oversees the payment system, among other things. But going back to monetary policy, yeah, the key objective is dual. So the central bank needs to ensure that we have price stability and we have full employment.  

Steve Odland: Yeah. And so, it's often referred to as an independent institution, and much has been talked about that the Fed needs to operate independently. What is this independence? How can it be independent from the government?  

Yelena Shulyatyeva: So this is a very key issue, and it's being discussed all the time, and it'sa very difficult concept, but in simple terms, is just basically shielding monetary policy from politics. It just means that we need to foster credibility and market confidence that the central bank acts independently from the government, just simply based on that dual mandate that we discussed earlier, to promote that price stability and full employment. We need to make sure that we prevent fiscal dominance such that the central bank is pushed to keep rates low to finance government debt. 

And another very interesting purpose is that we need to make sure that the Fed, the central bank, is free to act as it thinks is appropriate for the economy at the time of a crisis. So think about the great financial crisis or the COVID-19 response, when the central bank really acted very strongly to make sure that the economy doesn't go further into a crisis mode.  

Steve Odland: And do other central banks around the world work independently like this, as well? 

Yelena Shulyatyeva: So it really depends on the country. Some of them are in developed countries, they are considered at least independent. And some countries just think that that's not the best course of action. And it's really our all common goal is to make sure that in the US, the central bank continues to be independent. 

Steve Odland: So why, so help me again. So it seems like that there should be collaboration with the US Treasury, who is determining or is executing fiscal policy. Doesn't there need to be this connection between fiscal and monetary policy? And so how do you coordinate that if you have to prove independence? 

Yelena Shulyatyeva: There should be collaboration, and definitely a lot of communication is going on between the Treasury and the central bank. But what independence means from the Treasury, for example, is that it, the Treasury cannot just tell the Fed what to do. The Treasury issues debt, and the less expensive the debt is, the better for the fiscal situation. 

But the goal of the Fed is not that. The goal of the Fed, which is mandated by Congress, is to make sure we have that price stability, and full employment. And that is the key goal, and that is what the Fed should be focused on, not to help, say, the Treasury to issue cheaper debt.  

Steve Odland: And who established these goals? Was that part of the creation back in the early teens?  

Yelena Shulyatyeva:It's a long history. So in 1913, the central bank was created, and at that time, the whole purpose was to prevent instability and the bank runs, essentially. So that was one of the key issues at the time. Over the history, over the course of the 20th century and early in the 21st century, these goals evolved and transformed quite considerably. So, think about the period of World War II, for example. So the Fed actually held interest rates low enough to help the Treasury finance the military operations and things like that. 

We went through a period of significant Fed dependence on the administration during Arthur Burns' chairmanship. So he was very well known for succumbing to the pressure from the administration. And he kept interest rates low to make sure that unemployment rates stay low. And he totally forgot about the price stability part. And it took Paul Volcker a lot, very aggressive increases in interest rates to break the back of inflation. And that by itself played a very significant role in evolving Fed goals. 

So fast forward. In 1951, what happened is that the Treasury-Federal Reserve accord was signed and basically that freed the Fed from the obligation to pack interest rates for government financing. And I would highlight another milestone in the Fed's history: 1977 Federal Reserve Reform Act gave the Fed its dual mandate, the thing that we talk about today, the maximum employment and price stability. And these were the key milestones on the road to the Fed's independence. 

Steve Odland: Yeah. And so it's very important that people understand that the creation of the Fed and the mandates of the Fed are set in law, passed by the Congress, signed by the president, and hence, it's not as if they're acting independent in the sense that they do whatever they want. They're acting within the brackets and the objective set in the law. And so hence, the independence part of it is how to implement that in order to achieve those goals dictated by the law. So that's kind of a confusing thing to get to.  

Yelena Shulyatyeva:Yeah, that is very important to highlight that independence doesn't mean you can do whatever you want. It's actually, the Fed is accountable, and the Fed is accountable to Congress, which created it. And they have different kinds of things that they do. The chair of the Fed, for example, has to go to Capitol Hill twice a year, it's mandatory, to deliver semiannual monetary policy reports to Congress. 

They publish different kinds of forecasts, and the results of the impact of monetary policy on economies there. Sothere's a lot of discussion, and congressmen always ask tough questions, and the Fed is accountable for what they do. It's just that the Fed is independent to do things in the short run to make sure that the economy is doing great, to make sure longer-term price stability and full employment. 

Steve Odland: Yeah, so they have independence to operate within these guidelines, right? So that's the important thing to understand. OK, let's talk about the structure a little bit. People read in the paper about the Fed Board of Governors, and they read about the regional Federal Reserve banks. Just explain the total structure. What is the US Fed, the regional Feds, what are the Board of Governors? Who are all these people?  

Yelena Shulyatyeva: The Board of Governors is a Federal agency located in Washington, DC. It's a governing body. And then there are 12 reserve banks that are operating arms of the Federal Reserve System, essentially. Each Reserve Bank operates, within its own particular geographic area or district in the United States. But in a sense, those regional banks are relatively independent from the board. So, the board doesn't dictate the Federal Reserve President of Philadelphia region, for example, what they need to do. It's a governing body. So that's the structure of the Fed, so the Board of Governors and 12 regional banks.  

Steve Odland: OK, so what power do the regional banks have?  

Yelena Shulyatyeva: So what they usually do among the functions of the regional banks are supervising, for example, and examining banks and other financial institutions in their region. So, another thing that the Federal Reserve banks do, they collect the data, they talk to business contacts in their regions to see how the economy is doing, the regional economy. And they provide this feedback, namely in the Beige Book that we receive eight times a year, and the Fed publishes that. 

Also, regional bank Fed presidents participate in the FOMC meetings. So that is a very important function. And this is what the Fed is really very well known for, the FOMC meetings.  

Steve Odland: Yeah, so there are, so there's the Federal Reserve System, which is headquartered in Washington, DC, and sets monetary policy. Then there are these 12 regional Federal Reserve banks that, as you said, supervise and regulate the financial institutions essentially executing the monetary policy. Now, who appoints the Fed's board of governors?  

Yelena Shulyatyeva: So, there are seven Federal Reserve Board governors, and it's the president who appoints them, and they have to be confirmed by the Senate. So that's the process that each and every governor has to go through, even those who become the Fed chair and the Fed vice chair. Each of the Fed governors serves on one of the 14-year terms, and those terms are staggered such that the term expires in January of every even year. 

There are also four-year terms for the Fed chair and the Fed vice chair, and the president has the authority to nominate the Fed chair for four-year terms. So if the president is happy with the Fed chair, he or she can nominate that person for another four-year term.  

Steve Odland: We're talking about the US Federal Reserve System. We're going to take a short break and be right back. 

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board, and I'm joined today by Yelena Shulyatyeva, the senior US economist at The Conference Board. 

OK, so Yelena, before the break, we were talking about the terms of the Fed governors, their 14-year terms, that they're appointed by the president. They're confirmed by the Senate, the chair and the vice chair have four-year terms of that. So, did the chair and the vice chair have to come from one of the seven governors, or can they be appointed separately?  

Yelena Shulyatyeva: So, the president nominates, and Congress, and in particular, the Senate, has to confirm the appointments such that the governors can become the governors of the Federal Reserve Board. So then, the board can also nominate the FOMC chair and the vice chair. So this is separate from the Federal Reserve chair and the vice chair, which is also a prerogative of the president. So the president actually separately nominates the Fed chair and the vice chair to the Federal Reserve Board.  

Steve Odland: OK, got it. And so that's why the terms are different. So the chair and the vice chair don't have to come from a sitting or one of the other governors.  

Yelena Shulyatyeva: They have to be a governor to be nominated as a Fed chair, but it can also happen simultaneously, so such that if there is an opening on the seven-member FOMC board, a president can nominate a governor and at the same time nominate a person as a Fed chair to that open position. 

Steve Odland: Good. OK. Now then the question is, OK, that's how a governor and chair and the vice chair are put into position. You talked about their term limits. In what circumstances can a Fed chair or a Fed governor be removed from office? How does that work?  

Yelena Shulyatyeva: So, the Federal Reserve Act clearly says that by law, Federal Reserve governors, including the chair, can only be removed for cause by the president. The problem is that the statute doesn't spell out what the definition of "for cause" is. So in this case, it is up to the courts to kind of define what "for cause" means. Usually it's some ethical violations, corruption, neglect of duty, or incapacity that could be reasonably expected to constitute "for cause" definition. But again, there is no such law that fully explains what the definition is, and that's why it is usually up to courts to make such a decision.  

Steve Odland: A governor or chair or vice chair can resign on their own and leave before the end of their term, right?  

Yelena Shulyatyeva: Absolutely. That happened before, and there are different circumstances, whether it's a health issue or just other things that prevent governors from serving the full 14-year term.  

Steve Odland: Yeah. But this whole idea of a removal for cause is kind of a gray area, and you see that going on this year as the president is trying to remove one of the governors. And it is an open question because it's the question of whether whatever this person may or may not have done rises to the standard of cause. And hence, that gray area and the definition of cause is why the courts have to be involved now. How does that work? Does this have to go to the Supreme Court? 

Yelena Shulyatyeva: Well, given that it's unprecedented, right? We didn't have before the president trying to remove a Fed governor for cause. And given how big the stakes are and how big of an impact it could have on financial markets, eventually I think that will go to the Supreme Court to decide what really happens. 

Another complication with the "for cause" definition is that there's a big question whether it was something done while on the job as a governor, as opposed to what if something was done before a person became a governor. Sothere's a big distinction in there, as well, and there is no clear answer as to whether something that was done before the governorship could meet a "for cause" definition.  

Steve Odland: Yeah, and it's also a question of whether something that is unrelated to their work at the Fed can be used as a "for cause" definition of something for the Fed. This is why it is important that the courts deal with this, and hopefully, as this works its way through the system, they will clarify the definition of "cause" so that we can have some understanding of this going forward. 

But you can see that the administration has at least some influence on the Fed, certainly by appointment. The Congress, of course, has influence on it, the Senate approval, and then also the laws that are created that govern the actions. Beyond that, what influence does an administration have over monetary policy?  

Yelena Shulyatyeva: Well, it's a tough question, really. SoI think the key influence really comes from theappointment authority. So that is a really key thing that is kind of similar to what happens on the Supreme Court. For example, the president has the right to nominate people to those positions. But beyond that, how much influence the administration has over the conduct, I don't think it is that much. So once a person sits on the Fed, becomes a Fed governor, they actually should be able to act quite independently from another branch of government. The Fed is not a branch of the government, but it's an agency. 

SoI think that it is very important to remember that once you are on the board, you should be able to act in the best interest of the economy over the longer run. This is what most of the Fed governors are doing, I think.  

Steve Odland: So there are boundaries here. The administration can only do so much. I mean, clearly the appointment powers, as we talked about. There's the bully pulpit, but really that shouldn't, and from all reports, doesn't really impact a decision. They approach this with data and collect the data from the regional Feds and private sources. I mean, they're looking at everything to try to make their determinations right. Soit's usually very data driven. So, there are boundaries here and limitations on what a president can do.  

Yelena Shulyatyeva: Two key things to remember here. So first of all, the Fed is accountable to Congress, which created it, and they're accountable to make sure they conduct monetary policy such that they meet two objectives for full employment and price stability. So that's the key thing. And this is the goal, and the main goal. 

Another thing is that we need to remember that the FOMC, Federal Open Market Committee, which sets interest rates, key interest rates for the economy is not just the Fed Governors. So it consists of seven Fed governors and the regional presidents, five regional presidents each year also are able to vote on monetary policy. 

And a key thing to remember is that those regional Fed presidents are appointed by their respective regional Federal Reserve boards. Now the board, the Federal Reserve Board in Washington, DC, has the right to kind of veto those appointments every five years. And an interesting thing is that this new opportunity to veto those Fed presidents will be coming in January of 2026. 

So that's a very interesting timing at the time when there are questions about Federal Reserve governors' independence. But nonetheless, at the end of the day, it's not only the seven governors on the Federal Reserve Board, but it is also five presidents, five regional Fed presidents who are a part of the FOMC body that conducts monetary policy and sets policy rates. So that is another way that the Federal Reserve Act ensures monetary policy, independence and independence of the Fed.  

Steve Odland: Yeah. And there are no hard numbers in the law, but there'sgenerally this guideline that they're trying to achieve around 2% inflation and not get too much higher than that on average. And they're trying to get to about 2% or more GDP growth. Soit'ssort of the Goldilocks approach to trying to do that through this monetary policy implementation. And so we have a situation where inflation has been higher than that. And sothey've held the discount rate, and hence, that discount rate flushes through the economy. And it impacts the rates that banks borrow and hence, what they charge consumers and businesses for. Loans and credit card debt, auto loans, mortgage rate. All of these things ripple through the economy. 

It also impacts the US debt and then the interest rates required on the debt. And so we have a fiscal situation now where the interest on the debt is around a trillion dollars. We have a $2 trillion deficit. And so, the administration is trying to see if they can cut the amount of interest paid. If you could cut the Interest rates by a couple hundred basis points, it could save, round numbers, $400 billion, that's a lot off the deficit. So there are a lot of different factors going into the noise that is out there on this. And hence, you get to the tension that you hear or read about in the papers. 

Yelena Shulyatyeva: Totally. I think fiscal policy has to be separate from monetary policy.That's the best outcome for the economy over the longer run. So there are other ways to try to tame fiscal deficits and debt. So they have to be independent of what the Fed is doing. But again, the whole purpose of the Fed's monetary policy goal is to provide maximum employment and price stability over the longer run. And that is what Federal Reserve policymakers are genuinely trying to do based on the available data and their forecasts. And that is the purpose of the Fed, and that is what I hope we will continue to see, regardless of all the political pressure and the recent news on the Federal Reserve front. 

Steve Odland: Any other points that you would like to share with our listeners before we close today?  

Yelena Shulyatyeva: I think that it'svery important to remember what the history of the Federal Reserve tells us about the Fed independence. So we all started this really well, especially the economists. And we all learned the lessons from the past again, when the Fed, the Fed chairs were pressured really to keep rates low for the benefit of the short-term revival in the economy and the purpose of keeping the unemployment rate very low. 

And there is a cost to that. The cost is high inflation and particularly, if that high inflation causes inflation expectations to rise and become uncontrolled because this could actually lead to a really high inflation. 

And in turn, the Fed will have to act aggressively, as during the Paul Volcker era, and raise rates such that it arrests growth in the economy and would result in a recessionary scenario, a much worse outcome, if they kept rates relatively elevated to not allow inflation to rise in an uncontrollable fashion. 

Steve Odland: OK, we're going to leave it there. Yelena, thanks for being with us today.  

Yelena Shulyatyeva: It was my pleasure. Thank you.  

Steve Odland: And thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.