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• Amid swirling headlines relating to Trump’s Fed nominations and Governor Cook’s legal fight, investors should stay focused on the upcoming September FOMC meeting, where a rate cut remains likely.
• Concerns over Fed independence have surfaced, but market responses, particularly the 10-Year Treasury yield, have been relatively muted so far.
• With Powell likely to finish his term and recent dissents showing rare division within the Fed, investors should watch how internal dynamics may influence future policy decisions.

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The Federal Reserve has certainly garnered its fair share of the headlines lately. Whether it was Powell’s Jackson Hole guidance toward a likely rate cut in a couple of weeks or Fed Governor Cook’s potential removal from the Federal Reserve Board, investors have had a rash of news to digest in just the last couple of weeks. Against this backdrop, I wanted to provide some perspective and filter out the noise that has accompanied the headlines, focusing on the Federal Open Market Committee (FOMC) and how monetary policy decision-making is actually made.

There has been a lot of discussion and conjecture about how President Trump is trying to stack the FOMC, replacing the chair and governors with his own picks. First up, the chair. While we have seen anything is possible, the most likely scenario still involves Powell finishing out his term in May of next year. 

Turning to the Fed governors, there are a total of seven, including the chair. Adriana Kugler did hold one of those seats but has since resigned. The President has nominated Stephen Miran to fill this position, and recent reports suggest this nomination could be fast-tracked so he could participate as soon as this month’s FOMC meeting. That brings us to Governor Cook, who was fired by Trump last week and is awaiting the outcome of a lawsuit to see if she will be able to sit at this month’s policy gathering and vote. If the judge sides with the President, that will be another opening on the Board, but it is highly unlikely the seat could be filled in just a couple of weeks, or perhaps even time for the October and/or December FOMC meetings.

The FOMC is made up seven Fed governors and five Fed regional bank presidents when the FOMC has its full complement of voting members. The N.Y. Fed president, John Williams, is a permanent voting member. In addition, Williams is a veteran at the Fed, serving as the San Francisco president prior to his current position. Fed presidents are selected after a search by local business leaders. The Board of Governors has final say in the approval process, but history has shown it’s usually a “rubber stamp.” The four remaining voting presidents on the FOMC rotate on an annual basis.

While the Fed chair does hold powerful sway over the FOMC in the decision-making process, they still need to bring the rest of the voting members along in the process. While the July FOMC meeting did have two dissenting Fed governors, Waller and Bowman, (the first time in 30 years two governors dissented), the FOMC’s preference, and importantly historical precedent, has been to show a unified decision outcome.

Much has been made regarding the potential for Trump to have a majority of his picks as Fed governors. However, this is not necessarily a new or unprecedented development. Presidents in the past have had the opportunity to not only choose a new Fed chair, but also make their picks for Fed governors who either resigned for “normal” reasons or whose terms expired.

According to news reports, seven out of the eleven Fed chair candidates being considered—, Kevin Warsh, Christopher Waller, Michelle Bowman, James Bullard, Philip Jefferson, Larry Lindsey and Lorie Logan—have either sat or are currently sitting on the FOMC. As I wrote in my July 1 blog post, this is an important point when considering the enormous responsibility that comes with the job from both a monetary policy and financial markets perspective.

Bottom Line

If Fed independence is ultimately questioned, it could be more of a negative influence on the back end of the Treasury curve. However, we’re not there yet. And, thus far, the response from the UST 10-Year yield to all of the headlines has been relatively muted. The focus is on the data.

While a great deal of attention has been placed on current/future Fed nominees backing Trump’s call for rate cuts, it could become a moot point if Powell resumes the easing process in a couple of weeks.

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