Federal Reserve Faces Unprecedented Test as President Dismisses Board Member

The independence of the Federal Reserve is facing an unprecedented test as the President has dismissed a board member, sparking legal controversies and potentially igniting a constitutional storm regarding the central bank's autonomy.

The board member, who is the first African American woman to serve on the Federal Reserve Board, was appointed by the President and confirmed by the Senate in 2022 with a term extending until 2038. In a statement, the board member asserted that they would not resign and that the President lacks the authority to dismiss them without a valid reason. The board member's lawyer has explicitly stated that legal action will be taken against the President's decision, seeking a court injunction to prevent the dismissal from taking effect.

According to the Federal Reserve Act, the President can only dismiss a board member "for cause," but the definition of "for cause" has never been clearly established by Congress. Courts have historically limited this to misconduct, negligence, or malfeasance during their tenure. The President cited allegations of mortgage fraud during the board member's tenure as a professor at Michigan State University as the reason for the dismissal. However, these allegations have not entered the judicial process and occurred before the board member joined the Federal Reserve, raising significant questions about whether they constitute "for cause."

Analysts point out that such allegations typically do not apply to the "for cause" protection clause. Additionally, the Supreme Court recently expanded the President's power to dismiss members of independent agencies, explicitly excluding the Federal Reserve, highlighting the uniqueness of this case.

If the court ultimately supports the President's action, they will have the opportunity to further reshape the Federal Reserve. Recently, another board member has announced their resignation, and the term of the Federal Reserve Chair is set to expire next May. If the board member is forced to leave, the President will simultaneously hold three appointments, adding to the previously appointed Michelle Bowman and Christopher Waller. This faction would hold a majority in the seven-member board, potentially influencing the direction of the federal funds rate and having a profound impact on the reappointment review of regional Federal Reserve presidents in 2026.

Sources close to the matter have reported that the President has informed advisors of plans to quickly announce a replacement for the board member, with the top choice being their economic advisor. Additionally, the of the World Bank and a close ally of the President is also under consideration. If the economic advisor is appointed to replace the board member, the former World Bank president may be nominated to fill another vacancy on the board. Analysts suggest that this could give the President more influence over the Federal Reserve Board, potentially altering its long-standing independent operational structure.

The administration is reportedly exploring ways to influence regional Federal Reserve banks, particularly the selection process for regional presidents. Currently, the Federal Open Market Committee (FOMC) consists of seven board members and five regional presidents, who are not appointed by the President and do not require Senate confirmation. Insiders have expressed concern that the dismissal of the board member could be a signal of further attempts by the White House to weaken the central bank's independence.

During a cabinet meeting, the Treasury Secretary defended the President's actions, stating, "The independence of the Federal Reserve comes from a political arrangement with the American public. Public trust is its only source of credibility. The President is restoring public trust in the government, eliminating waste, fraud, and corruption." This statement indicates that the White House is seeking legal and political justification for the dismissal.