After the Senate changed hands, the White House's ability to place its own people within the Federal Reserve has been significantly reduced.

By: Long Yue, Wall Street Insights

Over the past two years, the independence of the Federal Reserve has faced unprecedented pressure. The White House attempted to remove a sitting Federal Reserve governor—this was the first time in the Fed's history. However, with the shift in Senate control, this leverage is quickly diminishing.

According to reports from Wind Trading Desk, JPMorgan's Chief Economist Michael Feroli pointed out in a research report published on November 4 that the change in the Senate will significantly lower this risk. The reason is simple: the appointment of Federal Reserve governors must be approved by the Senate, and now the White House's nominees must find candidates acceptable to Democratic senators; otherwise, the positions can only remain vacant.

Powell's "Legacy": The Only Vacancy

In the next two years, there will be only one vacancy on the Federal Reserve Board—the term of Chair Powell himself will expire in January 2028.

This means that under the new Senate dynamics, if the White House wants to fill this position, it has no choice but to nominate a candidate acceptable to Democratic senators or simply leave the position unfilled.

Feroli wrote in the report: "The election results mean that the administration now needs to replace Powell with someone who can be accepted by Senate Democrats; otherwise, the seat will remain vacant."

Wall Street Insights noted that American media also believe that the Democratic Party's regained control of the Senate, especially the Senate Banking Committee, effectively blocks Trump's ability to install loyalists on the Federal Reserve Board. Long-time supporters of Fed independence, such as Democratic senator Elizabeth Warren, are expected to take over as chair of the Banking Committee, meaning Trump’s future nominations for Fed officials may face stricter scrutiny or even be shelved. This could also give the Federal Reserve and its chair Warsh greater room to combat inflation through interest rate hikes.

What Is the Significance of Dismissing Cook?

The White House has been pushing for the dismissal of Federal Reserve Governor Cook. However, after the Senate changed hands, the actual significance of this action has greatly diminished.

Feroli's report directly addresses this logic: even if the dismissal is successful, the vacant position will not fall into the hands of someone favored by the administration. In other words, the political cost of removing Cook will not yield corresponding personnel returns.

Aside from the Board, the selection of regional Federal Reserve presidents also has indirect implications.

The report mentions that several media outlets have reported that in the search for a new president, the Atlanta Federal Reserve had contacted at least one former Trump administration official. Feroli pointed out that the changes in Washington's political landscape may alter the priorities for such selections.

However, this does not mean the Federal Reserve can rest easy from now on. The president still holds the power to nominate governors, and the executive branch can exert pressure on the central bank through other administrative and legal means. Democratic control of the Senate can prevent some nominations, but it cannot completely limit the White House's pressure on current Federal Reserve officials.

New Pressures Facing Warsh

The current chair of the Federal Reserve, Kevin Warsh, has a term that expires in May 2030. Before the next presidential election, the Senate's political landscape is likely to remain dominated by the Democrats—this adds an obstacle to Warsh's path to reappointment.

Feroli wrote in the report: "Unless he is willing to serve only one term, Warsh needs to spend less time looking out the window and more time walking the halls of Congress."

This echoes Powell's public advice to his successor before leaving office. Powell once said: "Congress is our window to democratic accountability. Going to Congress and communicating with people is not a passive burden but an active, regular obligation."

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