Who will be in charge of interest rates?

Credit: Dragon Claws via Getty Images.

Fed independence is a question of power. And, as with many institutions today, President Trump is trying to reduce the Fed’s power and increase his own. That dramatic backdrop makes today’s Senate confirmation hearing on Stephen Miran’s nomination for Fed Governor anything but normal. The term “Fed independence” will be invoked repeatedly, but words are not enough.

Fed independence is about who sets interest rates.

There is more to it, but at its core, Fed independence is about interest rates, the primary tool of monetary policy today. There are many questions we could ask:

• Who should be in charge? Politicians or technocrats? That’s a question that goes back to the founding of the Federal Reserve in 1913. The balance that Congress struck in the Federal Reserve Act has evolved, and it’s a topic worthy of further debate.

• Who is currently in charge is, in the law: the Federal Open Market Committee: seven Governors nominated by the President and Senate confirmed, plus five of the twelve Reserve Bank Presidents. Politicians influence who is in charge, and Congress can amend the Federal Reserve Act; however, politicians do not have the means to control day-to-day rate decisions at the Fed. Congress does not set the Fed’s budget, and the President cannot remove Fed Governors over their policy decisions. The Fed is not free from political influences, and it is accountable to Congress in various ways. However, the Federal Reserve Act intends that technocrats, not politicians, set interest rates based on economic conditions, rather than the next election cycle.

• Who will be in charge in the coming years is less clear at the moment, and that’s the reason for so much alarm. President Trump’s pressure campaign on the Fed to lower interest rates escalated dramatically last week with his attempted removal of Fed Governor Lisa Cook. “We’ll have a majority very shortly, so that will be great,” Trump later said during a Cabinet meeting. He suggested that the housing market would boom with the lower rates. With words and actions, the President has been taking steps to gain control over interest rates. That’s why the term Fed independence is everywhere; defending it is the equivalent of saying the President should not set interest rates. The historical record suggests that when politicians control interest rates, it often leads to inflation and instability.

Congress weighs in on Fed independence.

On Thursday, the Senate will hold a hearing on Stephen Miran’s nomination for Fed Governor. If confirmed, he would finish the remaining four months of a term left open by Adrianna Kugler’s resignation last month.

The normal part of the hearing will be the examination of Miran’s views on monetary policy, as well as financial stability and bank regulation. Does he have the expertise to be a voting member of the FOMC? He was previously confirmed in March by a vote of 53 to 46 to be the Chair of Trump’s Council of Economic Advisers, so his credentials as an economist have been vetted once. The anything-but-normal part of the hearing will be how the Senators and Miran deal with President Trump’s repeated attacks on Fed independence. Then there is Miran’s past writing on the topic.

The burning question is not so much whether Miran will vote to lower interest rates. The question is whether he will vote to put the President in charge of interest rates.

It is within the President’s authority to nominate someone on the Board who is in favor of lower interest rates. Presidents often put forward candidates who adhere to the views of their party on economic questions. (Powell, a registered Republican first nominated in 2011 by President Obama for a Fed Governor, is the last of the across-party nominations.) Even so, Senators should ask for the economic case for rate cuts—a case based on data, theory, and sound judgment. The case must focus on the dual mandate of price stability and maximum employment. Parroting the President’s claims that federal borrowing costs or mortgage rates should be lower is insufficient.

Miran should be pressed on the magnitude of the appropriate rate cuts. A one-and-a-half percentage point reduction can fit within standard frameworks. The three percentage point reduction that President Trump has called for would require an alternative framework. If Miran holds an alternative framework (which is entirely possible), the confirmation hearing would be the time to hear it. Again, that is not disqualifying, but the alternative framework should be aligned with the dual mandate. Miran should also be able to explain what economic conditions would warrant a rate increase as easily as why current conditions warrant a rate decrease. There’s some tension between his hawkish stance last fall before the election and his dovish stance now, but that’s something for him to address, not something to sink his nomination.

It’s questions about Fed independence that could be the hardest for Miran. The toughest critic of Miran’s nomination might be his former self. Last year, Miran criticized the ‘revolving door’ between the White House and the Fed (emphasis added):

… the ease with which top Fed personnel slide between party politics and supposedly nonpartisan technocracy gives lie to the latter. For instance, Austan Goolsbee, the new leader of the Chicago Fed, who was a top advisor to President Barack Obama, cochaired the economic advisory council[48] for the Biden campaign and frequently appeared in the media, described by journalists as a “Biden campaign surrogate.”[49] Former Fed vice chair Lael Brainard took a single weekend off between roles as the Fed’s vice chair and director of the National Economic Council (NEC).[50] NEC director is the single most political economic policy job in the entire federal government.

To be clear, Brainard and Goolsbee are both extremely talented economists who have made significant contributions to our nation. But to pretend that one can easily shift between highly political and allegedly nonpolitical roles without letting political biases inform policy is, at best, naïve—and, at worst, sinister.

Miran is currently serving in the very same “highly political” role that Austan Goolsbee held at the Council of Economic Advisers. He might not even have a weekend off, as the Senate Republicans are fast-tracking his confirmation to get him in place by the September 17th FOMC vote. Does Miran exempt himself from his own arguments? Or has he changed his mind?

In his prepared testimony for the Fed confirmation, Miran wrote,

Independence of monetary policy is a critical element for its success. Given the central bank's outsized role in the economy, it's no surprise that outsiders have opined on its decisions for decades. However, if confirmed, I plan to dutifully carry out my role pursuant to the mandates assigned by Congress. My opinions and decisions will be based on my analysis of the macroeconomy and what's best for its long-term stewardship.

So, would it be naïve or sinister to believe him? I would argue neither. Miran had a naïve view of Fed independence. Elected officials in Congress and the White House do influence monetary policy. The nominations and confirmations to the Fed Board reflect politics to some extent, but that is different from elected officials (and short-term politics) directly setting interest rates. Miran is correct that candidates for the FOMC should be scrutinized for their ability and commitment to follow the data and focus on the economic goals; having worked in the White House is not necessarily a disqualifying factor.

Normally, Miran’s musings on Fed independence could have been set aside as policy blue-sky thinking. Still, he might be in a position to “force” some of his nontraditional views into reality. Next February is the five-year review of the Reserve Bank Presidents. (Technically, the term Miran would expire in January, but the President has talked about nominating him for a longer term.) The Board has the final approval of the Reserve Bank Presidents’ re-appointments:

In considering whether to reappoint, the eligible Reserve Bank directors assess their president's performance. The assessment includes consideration of, for example, the president's ability to effectively lead the Reserve Bank, the president's performance in achieving the Reserve Bank's and Federal Reserve System's strategic objectives, and the president's ability to effectively represent the Federal Reserve to the public. The Reserve Bank directors' assessment is also informed by annual discussions between the chair and deputy chair of each Reserve Bank board and the Board of Governors' Committee on Federal Reserve Bank Affairs. [Waller is the chair of that committee, and Cook is a member.]

Reappointments are subject to approval by the Board of Governors, which reviews the Reserve Bank directors' assessment of their president's performance and any additional perspectives from members of the Board of Governors.

Does Miran still see Goolsbee, currently the President of the Chicago Fed, as too political to be an FOMC member? It is worth noting that the two current Governors, Chris Waller and Michelle Bowman, nominated by Trump, abstained from the Board’s initial vote on Goolsbee. If President Trump succeeds in removing Fed Governor Lisa Cook, that could yield a majority on the Board to remove Reserve Bank Presidents and another path to a Trump-supportive majority of the FOMC.

One Reserve Bank President is not enough. Are there other Reserve Bank Presidents whom Miran has concerns about? His writing suggests he might:

The second issue with personnel is the lack of performance-based accountability or incentives for performance. Since 2021, there were six appointments and reappointments to the Board of Governors and four new leaders of Reserve Banks. Despite the biggest monetary errors in four decades, not even one of these nine appointments was on record as having made reasonable predictions about the path of inflation. Recent Fed appointments have seemed to focus more on nominees’ immutable characteristics rather than qualifications. Some in Congress are even imposing racial tests on nominees.[51] Moreover, no Fed leader has resigned or been fired after the recent slew of monetary and regulatory errors. Two resigned in 2021 after scandals related to their personal trading, as they should—but what does it say about our priorities that we discard Fed leaders for minor ethical improprieties but not for poor performance that causes enormous economic pain to all Americans?[52]

Setting aside the innuendo that Fed officials since 2021 were selected based on their race and gender, one could read that passage as Miran supporting the removal of anyone on the FOMC in 2021 when they held rates low despite rising inflation. That includes Reserve Bank Presidents Tom Barkin, Raphael Bostic, Mary Daly, Neel Kashkari, and John Williams. If the Board votes down six of the twelve Reserve Bank presidents next year, in addition to being wildly unprecedented, it could create a path to the ultra-low interest rates that President Trump has demanded. Based on his own views, confirming Miran makes that scenario more likely.

Will Miran defer to President Trump on monetary policy, and will he use his authority as a Fed Governor to help the President gain even more control? These are outrageous questions to be asking someone nominated for Fed Governor, but they are essential given President Trump’s repeated attempts to gain control over the Fed.

In closing.

The Fed’s tools affect millions of American families and businesses. It’s unsurprising and welcome that the question of who should be in charge of those tools is an ongoing one. However, the Federal Reserve Act is clear that it’s technocrats, not the President, who are in charge of interest rates, for the benefit of the country. The Federal Reserve Act is what should guide the Senate as it evaluates nominations and the Courts as they decide on Lisa Cook’s case. Attacks on Fed independence are attacks on the rule of law. It’s about interest rates, and it’s about so much more than that.

Bonus Links:

• My Bloomberg piece last week asks what the Fed should do now that its independence is under attack. Some ideas:

Be explicit about the costs of political interference. In his speech, Powell discussed upside risks to inflation due to tariffs, but did not mention the risks associated with a politically controlled Fed. The key lesson of the last five years is the harm that inflation inflicts on people. The Fed should apply the same rigor and candor to the risks of a political Fed as it does to the risks of any other event. Fed independence matters because low inflation matters. Now is not the time for the Fed to be shy.

Open up the Fed. The Fed has a reputation for being a secretive organization, which makes it vulnerable to accusations of being political. Its closed-door nature could also conceal politically motivated decisions in the future. Livestreaming FOMC meetings, and publishing primary reference materials such as the Tealbook, would show how the current data-driven process works. It would also be a useful reference point if the Fed ever moves away from its current process.

Safeguard the Federal Reserve Bank presidents’ reviews. Next February, the Fed’s 12 branch presidents will undergo their five-year reviews, with the board of governors voting on each president. Normally, this process is a formality, but the White House has already signaled it sees it as a way to influence the FOMC. The Fed can try to pre-empt any concerns by providing details on the process and the review criteria.

As for Powell, he should commit to staying with the Fed as long as concerns about its independence remain. While his tenure as chair ends next May, his governor position extends to 2028. He should retain it — assuring at least one vote in support of the data-driven principles he outlined last week. Mariner Eccles, who was chair of the Fed from 1934 to 1948, is the only chair to stay on as a governor (until 1951) and he did so as the Fed was trying to regain its independence after World War II. By staying on as governor, Powell would send a message to the White House that its pressure campaign would come at a cost: He is a “shadow Fed chair” it would want to avoid.

• To better understand the legal aspects of the President’s attempt to remove Fed Governor Lisa Cook, I highly recommend this conversation between Peter Conti-Brown and David Beckworth.

The Fed’s Independence on Trial

• As part of a wide-ranging Q&A with Financial Times, I was asked about changes at the Fed.

Are there any elements of the radical approach that the current admin is taking that you have some sympathy with? Are there things about the Fed that you felt majorly needed changing?

Any institution, whether it’s the Fed or the Bureau of Labor Statistics, should continually be innovating, right? I worked at the Fed for over a decade, there were absolutely things about the way the work was done, the way it was communicated that I thought could be better. And I’ve been critical of the Fed at various points in time. But it comes from a place of “we can always improve and do better”. It’s an orientation of building up what you already have.

The United States enjoys a world-class central bank. It enjoys a world-class statistical system. Of course it can be better, but you should be lifting up more resources, pushing to improve.

The approach of this administration has been to tear down those agencies. Talk about our statistical agencies as if they are incompetent or cooking the books, talk about our Fed chair as a “moron”? It’s tearing the agencies down. I’m all for innovation and improvement and thinking outside the box — I think the Fed does struggle sometimes with groupthink — but it should come from a place of “we’re trying to do better” as opposed to burning it all down. That aspect of the quote-unquote “radicalism” from the administration I have no patience with, because I don’t really trust it. I’m not sure this is really about making these institutions stronger. Frankly, it looks like they’re trying to move them out of the way.

• Janet Yellen weighs in with what’s at stake with the removal of Lisa Cook.