Since President Trump took office in January 2025, he has not been shy about insisting the Federal Reserve should be lowering interest rates by a significant amount. With Trump recently nominating Kevin Warsh as the next Chair of the Federal Reserve Board of Governors, commonly referred to as the “Fed” or the “Central Bank”, it’s a good time to revisit the purpose of the Fed, how the Federal Reserve System works and how the Chair is put in place.
What is The Federal Reserve System?
Established in 1913, The Federal Reserve System is the central bank of the United States and is one of the most influential economic institutions in the world. The Fed was established to provide a safe, flexible and stable monetary and financial system. It is responsible for conducting monetary policy, supervising the banking system and safeguarding the stability of the U.S. financial system. Monetary policy refers to actions the Fed may take to manage the money supply, interest rates and credit availability to achieve economic goals. Sometimes referred to as its “dual mandate”, the two main goals of the Federal Reserve are maintaining stable prices (i.e., keeping inflation in check) and promoting maximum employment.
How Does the Federal Reserve System Work?
The Fed is made up of three main components: The Board of Governors, the twelve Regional Federal Reserve Banks and the Federal Open Market Committee (commonly referred to as the FOMC).
- The Board of Governors: Headquartered in Washington D.C., the Board consists of seven members or “governors” who serve staggered 14-year terms. The governors are nominated by the President of the United States and confirmed in their positions by the Senate. The Board has broad oversight of the entire Federal Reserve System, including setting regulations, determining the discount rate (more on this later) and supervising reserve requirements for banks.
- The Regional Federal Reserve Banks: Located in twelve different cities across the United States (including Cleveland), the twelve regional Federal Reserve Banks function as the “government’s bank”, by supporting the nation’s financial infrastructure. They are responsible for supervising and examining banks and other financial institutions, enforcing compliance with the federal consumer protection and fair lending laws and lending to depository institutions to ensure liquidity in the financial system. The regional banks provide significant amounts of information on financial conditions across their specific region, which is vital to formulating monetary policy decisions.
- The Federal Open Market Committee: The FOMC is a 12-person group of the Federal Reserve System that sets crucial U.S. monetary policy at meetings held at least eight times per year. The committee includes all seven members of the Board of Governors and five rotating regional Federal Reserve Bank presidents, including the President of the New York Fed, who has a permanent seat. The FOMC makes all decisions regarding the appropriate position or “stance” on monetary policy to help promote its dual mandate. It’s led by the Chair of the Federal Reserve, who is the chief executive of the Central Bank. As leader of the FOMC, the Chair influences interest rates and acts as a public voice on economic policy.
How is the Federal Reserve Chair Selected?
Because of the Fed’s pivotal role in the economy, the process for selecting the Chair is heavily scrutinized and can take months. The Chair is also nominated by the President of the United States and must be confirmed by the Senate. The Senate Banking Committee holds extensive hearings to vet the nominee, which are then followed by a full Senate vote. The Chair serves a four-year term that can be renewed through the same process, although the renewal process typically is not as lengthy. There is no limit to the number of terms the Chair can serve, provided they are renominated and reconfirmed. The Chair’s term is designed to be independent of the presidential election cycle.
Who is the Current Fed Chair and who will be the next Fed Chair?
Jerome Powell is the current Chair, with his term ending in May 2026. Powell was initially nominated to the Federal Reserve Board by President Obama in 2012. In 2018, President Trump nominated Powell as Chair, succeeding Janet Yellen, who served as Chair from 2014-2018. President Biden reappointed Powell for a second term in 2022. On January 30, 2026, President Trump nominated Kevin Warsh to succeed Jerome Powell, if confirmed by the Senate. Warsh served on the Federal Reserve Board from 2006 to 2011.
What Interest Rate does the FOMC control?
The Federal Reserve primarily controls the Federal Funds Rate. This is the target interest rate at which commercial banks borrow and lend their excess reserves to each other overnight. The rate is currently set with a target range of 3.50%-3.75%. The Fed will raise this interest rate to try to slow the economy, and it will cut the rate in efforts to stimulate economic growth. Higher inflation typically will lead to the Fed raising this rate, while lower inflation can lead the Fed to lower the rate.
It is important to note that the Fed does not directly set consumer interest rates. Rates on mortgages and student loans are more closely tied to long-term interest rates, such as the 10-year Treasury yield. However, the Fed Funds rate will directly impact money market, savings account and CD rates. A lower Fed fund rate leads to lower earnings on these products, negatively impacting “savers”.
How does the FOMC Change interest rates?
The process of raising and lowering the Fed Funds rates is not solely left to the Fed Chair. The 12-member FOMC committee votes to raise or lower the target range at each of its meetings. A majority vote rules, meaning at least seven members must vote in favor of the rate decision. Typically, these decisions are unanimous or near-unanimous. This voting system ensures the Fed Chair does not solely control interest rates.
Is The Federal Reserve’s Independence in Question?
The Fed did cut interest rates by 50 basis points in 2025, though President Trump has said rates should be as low as 1%. Lowering rates too quickly can stoke inflation, which goes against the dual mandate of the Federal Reserve. So far, Jerome Powell has resisted President Trump’s repeated push for lower interest rates as solid economic data makes it difficult to justify lower rates.
Now that President Trump has nominated a new Fed Chair in Kevin Warsh, questions over the long-term independence of the Fed have emerged. With Trump insisting on lower interest rates in the very near-term, speculation has arisen that one of the conditions of the next Fed Chair is that they would be expected to immediately lower interest rates. During Kevin Warsh’s term as a Fed governor from 2006 to 2011, he was more hawkish, favoring higher interest rates to fight inflation. However, more recently, Warsh has indicated that he favors lower interest rates to encourage economic growth, which aligns with President Trump’s views. How much Warsh would like to lower rates is not known.
The independence of the Federal Reserve is crucial for insulating monetary policy from short-term political pressures to ensure decisions focus on long-term economic stability rather than politicians winning elections in the short-term. As former Fed Chair Ben Bernanke in a 2010 speech so eloquently put it:
“Policymakers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy’s longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.”1
The bottom line is that, if confirmed, Kevin Warsh will certainly face political pressures to lower interest rates. While the Chair certainly can influence the direction and magnitude of interest rates, the system is designed so that no single individual can control the rate by themselves. From the staggered nominations for the board members to the rotating voting members, unless Congress changes the structure of the Fed, it is unlikely that full independence of the Federal Reserve will disappear, despite the immense political pressure that may be placed on it by political leaders.
1 Read More: https://www.federalreserve.gov/newsevents/speech/bernanke20100525a.htm