Despite President Trump's explicit expectations for the next Federal Reserve Chair, some incumbent Fed officials remain confident that any successor will adhere to the Fed's mission, partly because new leadership will recognize the gravity of the responsibility they shoulder.
"I sincerely hope the person the President selects to succeed Powell after his term ends in May will understand the official mandate given to the Fed by Congress, which is to keep inflation low and achieve maximum employment," New York Fed President John Williams told reporters on Monday.
Williams stated that he believes whoever is appointed will understand the importance of the role and the consequences of failure. He added that his long tenure at the Fed gives him confidence that any new leader will fulfill the mandate.
"The one constant in my experience at the Fed is that once you walk through these doors, you understand we have a responsibility that is very important to the American people," Williams said. "When we get it wrong, the consequences are significant; when we get it right, the consequences are also significant. I hope anyone in that role understands that and does their very best to fulfill the mandate given by Congress."
St. Louis Fed President Alberto Musalem expressed a similar view on Tuesday. "I expect a new chair to be very firmly committed to the dual mandate of maximum employment and price stability," he said.
"My colleagues and I are all committed to formulating monetary policy that is most suitable for the economy and for all Americans," Musalem added. "I don't believe this commitment will change based on who the chair is." He also stated that regarding policy formulation, "I expect the reaction function to remain unchanged and to be communicated to the public very effectively."
The two officials expressed their confidence as the Fed faces unprecedented attacks from the President on multiple fronts. Since returning to the White House a year ago, Trump has repeatedly criticized Powell, attempting to pressure the Fed into significant interest rate cuts, despite inflation being well above the 2% target and his trade policies exacerbating price pressures.
Trump has also repeatedly threatened to fire Powell for various reasons and has made it clear that whoever succeeds Powell will implement substantial rate cuts.
Trump's attacks on the Fed escalated significantly on Sunday when it was revealed that the Department of Justice had issued grand jury subpoenas to the Fed and related officials concerning the renovation process of the Fed's headquarters. This prompted Powell to push back, stating that these legal actions were essentially because the Fed refused to accept the President's directives on monetary policy.
In a statement on Sunday, Powell said, "Facing the threat of criminal charges is because the Fed sets interest rates based on our best assessment of the public interest, not following the President's preferences."
He added that the stakes in this confrontation are clear: "The question is whether the Fed can continue to set interest rates based on evidence and economic conditions, or whether monetary policy will be swayed by political pressure or intimidation."
The list of potential successors to Powell includes current Fed Governor Christopher Waller, former White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh, and BlackRock's chief bond investment manager, Rick Rieder.
Previous comments by Hassett and Warsh on inflation and other central bank matters have raised concerns among market participants about their candidacy for Fed Chair. The appointment of either could potentially align Fed policy more closely with the White House, which has explicitly desired a monetary policy stance at odds with the data.
Current Fed officials and many market participants agree that maintaining central bank independence is crucial, as it allows the institution to make difficult and potentially unpopular monetary policy choices insulated from short-term political factors.
In a speech at the Council on Foreign Relations, Williams stated that when central bank independence is compromised by political attacks, history shows it "often leads to very unfortunate economic outcomes, including economic paralysis and high inflation."
Musalem also echoed Williams' view on the critical importance of central bank independence and said he is not worried about the current candidates to replace Powell. "These candidates are all highly qualified," he said.
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