Administration Seeks Federal Reserve Control for Aggressive Easing

If the administration gains control of the majority of the Federal Reserve Board, it could push for more aggressive easing policies. This would involve bypassing the Federal Open Market Committee (FOMC) decisions and using technical means to lower the interest rate on reserve balances (IORB).

According to a report, the administration is attempting to gain control of the majority of the Federal Reserve Board by dismissing Board member. If successful, this strategy would provide powerful tools to enforce loose monetary policy against the overall will of the FOMC.

Following the resignation of Board member earlier this month, the administration has gained more support for loose monetary policy within the committee. Two Board members appointed by the administration voted against the rate hike at the July FOMC meeting and are expected to continue pushing for easing policies in the upcoming meeting. The nominee to replace Board member, the chairman of the Council of Economic Advisers, is expected to add another dovish voice to the recent policy debate.

If the administration successfully dismisses Board member and appoints a candidate who favors significant rate cuts, the power dynamics within the Board will shift. At that point, the Federal Reserve Board will have four stable dovish votes, constituting a majority of the seven seats on the Board. While this may not immediately give the administration an absolute majority in the 12-member FOMC, these four dissenting votes from the Board will significantly increase internal pressure for faster and larger rate cuts.

A Board with a majority of seats will have a much greater collective voice than before, posing a significant challenge to Federal Reserve Chairman and other cautious committee members. Even with high inflation data, this force will continue to push for easing policies.

One of the most direct and disruptive powers that a majority of Board seats can wield is the ability to unilaterally lower the IORB. The report highlights a key technical detail: the power to set the interest rate on reserve balances (IORB) lies with the Board, not the entire FOMC. Historically, the Board has always set the IORB at a level consistent with the FOMC's interest rate target range to ensure that the federal funds rate remains stable within the target range. However, this is merely a convention, not a legal requirement.

In theory, a Board majority that disagrees with the FOMC's decision could take unprecedented action: unilaterally voting to lower the IORB. If the goal is to lower interest rates and the FOMC as a whole (especially the regional Federal Reserve presidents) does not agree, the Board can use this channel to forcibly achieve part of the easing goal. Although the FOMC still controls the overnight reverse repurchase agreement rate (ONRRP) and can partially offset the impact by adjusting this rate, this internal power struggle will cause unprecedented turmoil in the money market. While the ultimate effect is uncertain, it is undoubtedly a direct challenge to the traditional FOMC decision-making framework.

In addition to directly influencing interest rate tools, a majority of Board seats also holds long-term power to reshape the composition of FOMC voting members. The report emphasizes that the appointment of all 12 regional Federal Reserve presidents requires Board approval every five years for reappointment. The next five-year approval cycle for presidents is in the first quarter of next year. A Board majority seeking aggressive easing policies can use this power to veto the reappointment applications of presidents who hold hawkish positions and oppose rate cuts. Through this method, the administration can gradually "clean up" the hawkish voices in the FOMC and tend to approve candidates who are more in line with its policy goals, fundamentally changing the voting dynamics of the FOMC and paving the way for long-term easing policies.

In summary, gaining a majority of seats on the Federal Reserve Board is far from just adding a few dovish votes. It unlocks various tools that can challenge, bypass, or even reshape the existing monetary policy-making framework, putting the independence of the Federal Reserve to its most severe test in decades.