After the Senate changed hands, the space for the White House to insert its people into the Federal Reserve has significantly narrowed.

Written by: Long Yue, Wall Street Journal

In the past two years, the independence of the Federal Reserve has faced unprecedented pressure. The White House attempted to dismiss a sitting Federal Reserve governor—this is the first time in the history of the Federal Reserve. However, with the change in Senate control, the effectiveness of this move is rapidly diminishing.

According to news from Wind Trading Desk, Michael Feroli, chief economist at JPMorgan Chase, pointed out in a research report released on November 4 that the change in Senate control will significantly reduce the aforementioned risks. The reason is simple: the appointment of Federal Reserve governors must be approved by the Senate, and now, the White House's nomination must find candidates acceptable to Democratic senators; otherwise, the seat can only remain vacant.

Powell's "Legacy": The Only Vacancy

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

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

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

The Wall Street Journal 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 place loyalists on the Federal Reserve Board. Long-time supporter of Federal Reserve independence, Democratic senator Elizabeth Warren is expected to chair the Banking Committee, and Trump's future nominations for Federal Reserve officials may face stricter scrutiny or even be postponed. This might also give the Federal Reserve and its chairman Warsh greater leeway to combat inflation through interest rate hikes.

What Does Cook's Removal Mean?

The White House had previously been advocating the removal of Federal Reserve governor Cook. However, after the Senate changed hands, the practical significance of this move has greatly diminished.

Feroli's report directly points out this logic: even if the removal is successful, the vacant seat will not fall into the hands desired by the administration. In other words, the political cost of removing Cook will not bring the corresponding personnel returns.

In addition to the Board, the selection of regional Federal Reserve presidents also has an indirect impact.

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

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

New Pressures Faced by Warsh

The current Chairman of the Federal Reserve, Kevin Warsh, has a term expiring in May 2030. Before the next election, the political landscape of the Senate is likely to remain dominated by the Democrats—which adds a hurdle to Warsh's path to reappointment.

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

This statement echoes Powell's public advice to his successor before he stepped down. Powell once said, "Congress is the window between us and democratic accountability. Going to Congress, communicating with people, is not a passive burden but an active, regular obligation."