along-standing dispute between us president donald trump and federal reserve chairman jerome powell has come to a head.
trump accused powell of hesitating to lower interest rates and hampering the us economy, labeling him the worst person to ever lead the federal reserve and calling for his dismissal, a demand he first made during his 2018 term.
powell defended his decisions, explaining that they are guided by inflation and employment data, and stressed the importance of maintaining the federal reserve’s independence.
trump escalated the conflict by referring powell for investigation over suspicions related to the $4 billion cost of renovating the federal reserve headquarters.
powell viewed this as a pretext to pressure him into changing his stance on monetary policy, and issued an unprecedented statement in the history of the federal reserve to defend his position.
but how does the federal reserve operate?
the federal reserve, or central bank, was established by congress in 1913 with a hybrid public-private structure designed to prevent any single sector from dominating the economy. private national banks can become members of the 12 regional federal reserve banks, earning limited profits but having no role in setting u.s. monetary policy.
the federal reserve’s primary objectives are to provide a flexible currency, act as a lender of last resort for banks, rediscount commercial paper, and strengthen banking supervision to prevent financial panics and bank runs.
its structure consists of three main components - the board of governors in washington, whose chair and members are appointed by the u.s. president and confirmed by the senate, the 12 regional federal reserve banks, each serving a specific geographic region, and the federal open market committee (fomc), the most influential body, responsible for setting monetary policy, including interest rates and asset purchases.
the fomc is composed of 12 members - five regional federal reserve bank presidents, whose voting rights rotate, and seven governors, including the permanent governor of new york.
the president of the federal reserve bank of new york holds a vote at every meeting.
the other 11 governors are divided into four groups, each voting roughly every three years. this structure combines public and private elements and distributes power geographically, ensuring that no single entity, whether wall street, the white house, or congress, can dominate monetary policy. this system has allowed the federal reserve to maintain its independence since its creation.
some private national banks hold shares in their respective regional federal reserve banks. these shares are a requirement for membership, not optional investments. they are non-tradable, cannot be pledged, and legally receive dividends capped at six percent.
the 12 federal reserve banks serve as central banks for their respective regions but do not control interest rates, issue currency, or make other federal policy decisions.
instead, the federal reserve is managed by the board of governors, overseen by the chair and the commissioners, all of whom are federal employees paid by the government. the president does not have the authority to dismiss them.
any profits generated by the federal reserve are transferred to the u.s. treasury, even though the bank has incurred accounting losses in recent years due to high interest rates. despite this, the chairman has refused to lower interest rates, insisting on the federal reserve’s independence in decision-making.