This week could mark the beginning of the end of the Federal Reserve as we have known it.
President Trump has been upfront in his belief that the Federal Reserve should be subordinate to his will. Until now, however, he largely channeled this belief into impotent social media posts. That changed with his announcement that he is firing Lisa Cook from the central bank’s Board of Governors — a step she said late Monday she would contest through the legal system.
All of this had not happened in the Federal Reserve’s history. And while Mr. Trump cited apparent misstatements on mortgage forms as the reason for her removal, it’s been clear for months that he wants to extend his control over the only part of the executive branch that has maintained any independence.
Independence is vital: People, from governments to banks, need to have confidence the Fed is making its own decisions; otherwise, bad outcomes can easily follow. That the Federal Reserve makes its interest rate decisions through a majority vote of the 12 voting members of the Federal Open Market Committee has been essential to this. That autonomy allows the Fed to credibly commit to maintaining the value of the currency through low and stable inflation while resisting highly destabilizing demands like Mr. Trump’s recent insistence that it cut the federal funds interest rate from 4.38 percent to 1 percent.
The system for selecting these voters is designed to protect that independence, with staggered terms and rotations of regional presidents. Governors are removable only through cause — something that has traditionally been understood to be very serious — so that presidents cannot simply replace them with people who will follow their every command. Their autonomy benefits the entire country by protecting governors from political influence.
The independence of the Federal Reserve is not lost, but to defend it will require the simultaneous efforts of several institutions. The first is the courts. The Supreme Court recently all but stated that Federal Reserve officials could not be removed at will, but what counts as cause is an open legal question. The Supreme Court needs to make it clear that the bar for removal is very high and that the president cannot selectively target anyone who gets in the way of his designs to control the Fed.
The second is the Senate. It has the power of advice and consent over presidential nominations. Right now, there is one unambiguous vacancy on the Federal Reserve Board, and if the courts do not prevent Ms. Cook’s removal, there will be a second. The term of Jerome Powell, the Federal Reserve chair, ends next May, and the Senate will also need to confirm his replacement.
It would be nice to have people who are knowledgeable and thoughtful in these positions. But at this point, the only must-have requirement is that the nominees respect the independence of the Federal Reserve and intend to make their own choices about monetary policy. If the Senate believes any nominees do not, then senators should reject them.
The third is the Federal Reserve itself. The institution is headed toward a numbers game. At their last meeting, 10 Fed officials voted for the federal funds rate to be 4.38 percent, and two voted for 4.13 percent, reflecting a healthy debate about a difficult question. But Fed officials need to make it crystal clear that they are unanimous in defending their prerogative to do what Congress asked them to in the Federal Reserve Act: use their independent judgment to set monetary policy in order to maintain price stability and maximum employment.
To date, all three of these institutions have worked. The Supreme Court has pre-emptively established some protection for Fed officials. In Mr. Trump’s first term, the Republican-controlled Senate rejected his more irresponsible ideas for the Federal Reserve. And the governors of the Federal Reserve, including the ones nominated by Mr. Trump in his first term, have all acted responsibly. This will be much harder — and much more important.
About the author: Jason Furman was the chairman of the White House Council of Economic Advisers from 2013 to 2017.
