The independence of the Federal Reserve has gained solid guarantees, and the White House's space for intervening in interest rate and regulatory decisions has significantly shrunk, leaving Waller potentially facing an isolated leadership without political allies.

Written by: Zhang Yaqi, Wall Street Journal

The Democratic Party's takeover of the majority in the Senate has blocked the White House's channels to install personnel in the Federal Reserve, posing the strongest resistance to Trump's ambitions to reshape the central bank to date.

According to an analysis by Nick Timiraos from the "New Fed News Agency" in the Wall Street Journal, the results of last week's midterm elections allowed the Democratic Party to regain control of the Senate, thereby gaining the institutional power to block any Federal Reserve nominees from Trump. This is the largest counterbalance the White House has faced so far—despite Trump having sent his preferred candidate Waller to the position of Federal Reserve Chair, he now lacks a crucial vote in securing a majority on the board, and the outlook is increasingly bleak.

The direct impact of this situation on the market is that the independence of the Federal Reserve's monetary policy has gained stronger institutional guarantees, and the White House's space for intervening in interest rate decisions through personnel appointments has been significantly reduced. Timiraos quotes investment manager and co-author of a study on the relationship between the Federal Reserve and Congress, Mark Spindel, stating that the possibility of Trump reshaping the relationship between the central bank and the White House "has completely ended on Tuesday"; "He simply cannot install anyone on the board anymore or fill party seats, that's it."

Prior checks and balances were scattered; Democratic Senate provides an institutional firewall

Before the election results were announced, external checks on Trump’s ambitions to control the Federal Reserve were always scattered and weak: a retiring Republican senator had blocked Federal Reserve nominations; Powell decided to remain on the board after stepping down as chair; a court ruling temporarily upheld the position of Federal Reserve Governor Lisa Cook.

The Democratic Party's takeover of the Senate has integrated these individual defensive lines into a systematic barrier—covering all nominations for the seven-member Federal Reserve board during the remaining term of Trump. According to Nick Timiraos from the Wall Street Journal, this is the broadest institutional-level countermeasure against the White House’s direct challenge to Federal Reserve independence in decades.

Currently, among the seven governors of the Federal Reserve, Trump has nominated three: Chair Waller, Vice Chair Michelle Bowman, and Stephen Miran (the latter departed in May this year). The remaining four seats—Powell, Michael Barr, Philip Jefferson, and Lisa Cook—were all nominated during the Obama or Biden administrations.

The next planned vacancy is Powell's board position, which extends until January 2028. At the same time, Trump is attempting to create a vacancy early by firing Cook—claiming mortgage fraud as grounds for her removal and planning a hearing in December, to which Cook herself denies the related allegations. The Supreme Court ruled in June that Cook could remain temporarily during the appeal process.

However, even if Trump ultimately wins on the judicial front, the Democratic-controlled Senate could still refuse to confirm a successor, leaving the position vacant.

Interest rate decision structures determine the boundaries of personnel influence

It is noteworthy that the Federal Reserve’s interest rate decisions are not made solely by governors nominated by the president but are instead collectively reviewed by the 19 officials of the Federal Open Market Committee (FOMC). Each meeting has 12 members voting: 7 governors nominated by the president, the president of the New York Federal Reserve, and 4 rotating from the remaining 11 regional Federal Reserve bank presidents—who are not politically appointed. Trump currently only holds three of these 12 voting positions.

This structure means that, even if the White House successfully installs more governors, the influence on the direction of monetary policy is quite limited. The Federal Reserve under Waller has been operating in a direction contrary to Trump's wishes—rising inflationary pressures prompted the central bank to raise rates for the first time in September (the first since 2023) and to maintain rates last month, with the market expecting another rate hike in December. Trump blames this on the so-called "political" board that hampers Waller.

During Miran's time as a governor, he voted in favor of easing policies in all six meetings he attended, but only once gained support from other officials, clearly revealing the limitations of a single vote.

Waller may lead the Federal Reserve without allies

For Waller, a Democratic-controlled Senate means he may have to lead the Federal Reserve over the next two years without being able to choose his colleagues almost at all. He hopes to implement systematic reforms in communication methods, economic judgment frameworks, and balance sheet management at the Federal Reserve, but in the absence of a deal between the White House and the Democratic Senate, this vision will heavily depend on persuading colleagues he did not personally select—including three Biden-nominated governors and former chair Powell.

Derek Tang, an economist at Monetary Policy Analytics, pointed out that past Federal Reserve chairs have relied on "a strong vice chair to guide their thinking and build consensus within the committee," and for Waller, "this pathway has clearly narrowed."

Historical precedents corroborate this logic: Ben Bernanke welcomed Waller and his co-author on inflation targeting, Frederic Mishkin, shortly after taking charge; Janet Yellen was joined by the esteemed Stanley Fischer as vice chair just months after she became chair in 2014; and Powell ensured Richard Clarida became his compatible vice chair partner behind the scenes in 2018.

Regulatory agenda hindered, stability of institutional arrangements in question

The impact in banking regulation and payments is also significant. The Federal Reserve board decides these matters alone, but has rarely passed significant rules with a narrow 4 to 3 majority. If Trump cannot fulfill the fourth nominated governor, Bowman’s initiatives to relax capital requirements for large banks, as well as to open the Federal Reserve payment system to non-bank entities, will require at least one Democratic-nominated governor's support to move forward.

Another pending question is whether Powell and the other governors will think the Federal Reserve's institutional arrangements are stable enough to choose to leave. Powell has previously explained his rare decision to remain on the board after stepping down as chair by stating he hoped the Federal Reserve and the administration could "return to a path of respecting laws and practices, allowing the Federal Reserve to do its job." The logic behind this statement may now face a new test due to changes in the Senate's dynamics.