The Federal Reserve’s power: Congress giveth and Congress can taketh away

That’s as the Fed faces questions its independence and role in the economy amid pressure from the White House to lower interest rates

The White House’s relentless pressure on the Federal Reserve has kindled a debate on the central bank’s independence and role in the economy

While President Donald Trump has backed off earlier suggestions that he would fire Fed Chairman Jerome Powell, he continues to demand lower interest rates

The surprise announcement Friday that Governor Adriana Kugler will step down next week, well ahead of her expected departure in January when her term on the board of governors expires, gives Trump an early start on picking Powell’s replacement

The president has already said he would nominate a new chair who would lower rates

That’s despite the continued resistance from Powell and most other policymakers to keep rates steady as Trump’s tariffs make their way through the economy and put upward pressure on inflation

Amid the standoff between the White House and the Fed, Congress has the power to modify the central bank’s authority and mission

Wharton finance fessor Jeremy Siegel highlighted this potential last month, when he told CNBC that Powell may need to resign in order to preserve the Fed’s long-term independence

His reasoning: if the economy stumbles, then Trump can point to Powell as the “perfect scapegoat” and ask Congress to give him more power over the Fed. “That is a threat

Don’t forget, our Federal Reserve is not at all a part of our Constitution

It’s a creature of the U.S

All its powers devolve from Congress,” Siegel explained. “Congress has am the Federal Reserve Act many times

It could take away powers.” In fact, Siegel’s fears may be realized

The economy has flashed sudden warning signs, most notably Friday’s shocking jobs report that showed payroll gains were much weaker than previously thought

Economists at JPMorgan even cautioned that the report flashes a recession alert as it suggests a sharp decline in labor demand from es

Amending the Fed’s dual mandate Congress’ leverage over the Fed is not lost on lawmakers

At an Axios event this past week, Sen

Bernie Moreno, R-Ohio, was asked if the Federal Reserve Act needs to be changed or d. “There’s a lot of things that we should talk ,” he replied. “For example, should the Federal Reserve be paying interest rates to banks for their overnight deposits? I think that’s a legitimate question that we need to examine a little bit more.” In addition to paying U.S. banks interest on their reserves, he pointed out that the Fed pays foreign banks to hold money in America, adding “I don’t know that that’s a good plan

He said Congress should take another look at the Fed’s mission, suggesting the mandate should be modified to target maximum employment “at the highest possible wage.” As for the other piece of the dual mandate, Moreno also said “we need to make certain that we understand what they’re looking at when it comes to inflation.” As an example, he noted Powell’s failure to hike rates sooner during the pandemic, when there was a supply shock and a spike in demand from all the stimulus

He also pointed to the Powell’s current reluctance to lower rates despite no indications yet that tariffs have caused a big spike in inflation and while taxes are coming down. “So it’s, ‘how do you analyze this?'” Moreno explained. “And I think he’s looking at from a very political lens

He should be looking at from a very apolitical lens.” For his part, he also told Axios earlier in the conversation that he “absolutely” believes in central bank independence but added that Powell could be legitimately fired for being “extraordinarily incompetent.” Fed independence Of course, the Fed isn’t completely devoid of any political influence

The president nominates and the Senate confirms members the board of governors, including the chair and vice chair

The Fed chair also must testify before Congress regularly and gets grilled by lawmakers

At the same time, the Fed was structured to be somewhat insulated from political pressures

Governors have 14-year terms that expire on a staggered scheduled, preventing a single president from completely revamping the board all at once

Governors also can’t be removed for policy disagreements and can only be ousted “for cause,” which has been interpreted to mean gross neglect of duty or malfeasance

Regional Fed presidents are also not politically appointed, and the Fed funds its own operations without appriations from lawmakers

That’s why Fed independence is a tricky concept, Michael Pugliese, senior economist at Wells Fargo, told Fortune, as it largely derives from a mix of laws, norms, informal agreements and traditions. “It’s not there’s an independence clause,” he said. “It’s more that the structure itself is built a little bit independent of the political system.” Pugliese thinks it’s highly unly Congress will amend the Federal Reserve Act to allow for more explicit influence from the White House

That’s because Democrats wouldn’t go along with it, and Republicans bably wouldn’t get rid of the filibuster rule in the Senate to immediately erode the Fed’s independence, he said. “Getting rid of the filibuster would bably open the door to tons and tons and tons of other policy discussions on a lot of different issues, not just the Federal Reserve Act.” Pugliese explained. “The filibuster has stuck around as long as it has because both parties have had reasons and cause to not change it

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