Independence of the Chairman of the Federal Reserve of the United States

President Trump has repeatedly called for a lowering of the interest rate in the United States, while intensifying his attacks against the Chairman of the Federal Reserve, Jerome Powell, and threatening to fire him. According to recent reports, removing Powell is of the table for now, but there is no guarantee the proposal will not resurface in the future.

In western countries, including in Israel, the central bank’s targets (including price stability) are prescribed by law, and the tools that the bank can use to achieve its targets – mainly the interest rate – are under the central bank’s exclusive responsibility. This authority has been delegated to central banks because governments tend to prefer low interest rates in order to encourage short-term growth. On the other hand, the heads of central banks consider the long-term impact on the economy, its stability and development.

For that same reason, the heads of central banks were given independence from the government, which includes protection against dismissal. The U.S. Federal Reserve Act  prescribes that the chairman of the Federal Reserve is appointed for a four-year term from among the members of the Federal Reserve Board. A member of the Federal Reserve Board can only be removed from office “for cause.” The accepted interpretation of “for cause” is that a member of the Federal Reserve Board cannot be fired merely due to a disagreement concerning which economic policy should be pursued.

As with many other issues, President Trump may try to challenge this interpretation and argue that he has the power to fire anyone who is a member of an agency subordinate to the executive branch.

The rumors surrounding the attempts to oust Mr. Powell from the Federal Reserve have  triggered dives in the US stock markets, and the rejection of the rumors have somewhat quieted the markets, for now.  

The Bank of Israel Law of 2010 prescribes that the Governor of the Bank of Israel is appointed for a five-year term by the President of the State of Israel according to the government’s recommendation, which appointment can be extended for an additional term (section 10). The Israeli law also prescribes that the governor can only be removed from office for particular causes (malfeasance, a violation of the prohibition of additional occupation, or incapacity). In other words, it is absolutely clear that the Governor of the Bank of Israel cannot be ousted due to disagreements on economic policy