Can Trump get super low interest rates by replacing Jay Powell?

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs comments on recent speculation about Federal Reserve Chairman Jerome Powell’s replacement and Trump’s efforts to get lower, even 1% interest rates.

Trump: "Change that to zero."

Longtime readers of Cautious Optimism have probably noticed the Economics Correspondent’s columns lean heavily towards money, banking, and central banking. So given all the recent headlines about Donald Trump’s criticism of Federal Reserve Chairman Jerome Powell it seemed like a good time to discuss whether or not replacing Powell will clear the way for super low interest rates.

First a little background. Despite his heavy criticism of Jay Powell, the Fed chairman was actually Trump’s pick to head the central bank back in 2017, beating out former Fed governor Kevin Warsh and Stanford economist John Taylor (both Milton Friedmanites). At the time the press speculated Trump chose Powell because he was a Republican, but so too are Warsh and Taylor.

Once Powell cleared Senate confirmation Trump quickly called on him to lower interest rates to zero or even negative rates. Powell ignored those pleas, instead continuing the Fed’s ongoing gradual incremental rate hikes from seven years of zero under Barack Obama plus a meager one-quarter percent in 2016.

Some conservatives began to suspect the Powell Fed was deliberately acting to hurt the economy, and by extension Trump. However the stock market got spooked by rising rates in late 2018 and the Fed immediately stopped hiking followed by three rate cuts in 2019.

When Covid struck in early 2020 the Fed slashed rates to zero, suspended all bank reserve requirements, and flooded the banking system with trillions of dollars in reserves above the 2008 Fed’s record response to the Great Financial Crisis.

The Correspondent sees all these moves as consistent with the Fed’s playbook—a flawed playbook in his opinion but nevertheless consistent—and not those of a central bank conspiring to politically destroy a president. If the Fed really wanted to hurt Trump it could have continued hiking in 2019. Or handed the golden opportunity to sink a vulnerable president the Fed could have refused to slash rates during the 2020 election year pandemic, but it didn’t.

Fast forward to 2025 and Jay Powell’s second term is almost complete, officially ending in May of 2026.

Everyone knows Trump won’t renominate Powell and the focus has shifted to his potential successor. Will it be Treasury Secretary Scott Bessent? Director of the White House National Economic Council Kevin Hassett? Whoever it is, many believe he or she will have to toe Trump’s superlow interest rate line to get nominated since he’s said repeatedly rates need to come down to as low as 1%.

By now CO Nation probably knows the Economics Correspondent is no fan of the Fed and believes interest rates should be set not by the Fed, but by the free market of supply and demand. That is: the supply of loanable saved funds and demand for loans intersecting at whatever interest rate allows all savings to clear the credit markets, not by edict of a handful of PhD technocrats guessing every 45 days where to set by far the most important price in the economy.

The Correspondent also thinks Powell turned out to be a pretty clueless Fed chair in his first term. For example, when inflation took off in 2022 Powell was asked in Congressional testimony whether continuing to expand the money supply at a 12-13% annual clip had anything to do with rapidly rising prices.

In an answer that Kevin Warsh recently said would have “outraged” the late Milton Friedman, Powell answered the ballooning money supply had virtually nothing to do with inflation.

”There was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time... the correlation between […] M2 and inflation is just very, very low.”

-February 2022 (when annualized inflation was at 7.1% and still rising)

Later that year Powell reversed himself, stating:

”We now understand better how little we understand about inflation.” (June 29, 2022)

Today inflation is still running above the Fed’s 2% target, and as some in CO Nation think the government is reporting lowballed inflation numbers the Economics Correspondent personally thinks forcing the Fed’s policy rates down from 4.33% (as of July 21) to 1% is a bad idea. However the focus of this column is primarily on whether or not Trump’s new Fed chair can make 1% interest rates happen or not.

And in the Correspondent’s opinion, replacing Powell isn’t going to get Trump anywhere close because under the Fed’s voting structure one chairman just isn’t enough. 

Here’s how it works.

THE FOMC STRUCTURE

The Federal Reserve’s policy interest rates—the discount rate, interest on reserves (IOR)  rate, and the subsequent federal funds rate—along with the pace at which the Fed creates or destroys bank reserves by buying and selling securities, are all set by the Federal Open Market Committee (FOMC) eight times a year. This is the same meeting where Jay Powell announces on a Wednesday that rates are going up, down or not changing.

The FOMC was created by the Great Depression-era Banking Act of 1933, also known as the Glass-Steagall Act, and it has twelve voting members.

Although Jay Powell is chairman of the Federal Reserve System, he only has one FOMC vote.

And who are the others?

The FOMC is comprised of seven members of the Federal Reserve Board of Governors (of which Powell is one), the president of the New York Fed, and the presidents of four of the twelve regional Federal Reserve banks that change on a yearly rotating basis.

Side note: the Federal Reserve has a strange hierarchy where governors rank higher than presidents. Most overseas central banks are headed by a governor.

The Fed governors, just like the chairman, are nominated by the U.S. President and confirmed by the Senate. However, they serve fourteen year terms. Although the Fed chairman only serves four year terms, his governor seat lasts fourteen years.

So how many voting governors are up for exit and potentially replaceable during Trump’s term? 

Just two of seven.

Adriana Kugler’s term expires in 2026 and Powell’s term as governor in 2028.

Therefore five of the seven voting governors will not change under Trump.

As for the regional bank presidents, they serve five year terms and a few of those will expire during Trump’s term. New York Fed president John Williams’ term expires in 2026. A couple of others expire soon like the Atlanta (2026), Chicago (2027), and Dallas Fed presidents (2027).

However most of those presidents will opt to serve for another five year term, and even if they choose to retire the U.S. President has no say over who is nominated to replace them. New regional bank presidents are nominated by the regional bank’s Board of Directors and confirmed by the Federal Reserve System’s Board of Governors.

So let’s say Trump nominates a new Fed chairman who agrees to do his bidding and push interest rates down as far as the White House asks.

First we have to assume that, like some Supreme Court justices or even Jay Powell himself, the new Fed chair doesn’t just tell the President what he wants to hear and, once he’s in office (sorry for the PC crowd, I’m just going to use “he” to make it easier from here on out), decides to march to his own beat.

We also have to assume that if, as nominee, he’s suspected of advocating super low interest rates he doesn’t fail to secure enough Senate confirmation votes.

Then, if he survives all that and really does want to cut rates to 1%, he’s still only one voting member on a policy committee of twelve. Granted, the chairman has more influence on the committee than any other single member, but if his policy is viewed as too radical he can be, and historically has been, outvoted by his colleagues. 

This famously happened during the Jimmy Carter presidency. Carter handpicked Fed Chair G. William Miller, an industrial CEO with no experience in money or banking matters which made him malleable to White House direction. Carter demanded a high inflation policy that he believed, incorrectly, would end a decade of stagflation. At first Miller accommodated with a faster and faster printing press and even pushed for more when inflation had surpassed 10%. Eventually the ultra-dovish Miller was being outvoted by the rest of the FOMC and he was replaced by Paul Volcker.

Meanwhile Trump will have minimal influence over the other eleven FOMC members.

Five of the seven governors are going nowhere during Trump’s term because their terms don’t expire until 2030, 2032, 2034, 2036, and 2038 respectively.

Most of the rotating regional voting presidents aren’t going anywhere either, although it’s possible that of the two or three whose terms expire soon some may choose not to stay on.

But then their replacements are selected by the regional Fed bank’s Board of Directors, not Trump, and confirmed by the Board of Governors. The Board of Governors has seven members five of whom aren’t changing during Trump’s term, so there’s no way he can load it up with allies to get a handful of voting Fed presidents he wants.

The bottom line is that simply changing one Fed chairman isn’t going to give Trump nearly the degree of control he wants over monetary policy. Absent a recession or crisis, Trump probably won't see 1% rates anytime soon.

And in this case, even though the Economics Correspondent is anti-Fed, that’s probably a good thing. Inflation is still too high, and pushing rates from 4.33% down to 1% will only accelerate the pace at which the Fed and banking system create new money.

Perhaps sometime soon the Correspondent will revisit the subject of money creation under our fiat banking/central banking system, a complicated subject in and of itself.

To learn more about the FOMC’s members, go to:

https://www.federalreserve.gov/monetarypolicy/fomc.htm