Agency deserves praise, won't buckle to pressure

The U.S. Federal Reserve is under siege. President Donald Trump threatens to fire Chair Jerome Powell. Others hurl criticism in hopes of becoming Powell's successor.

Two Fed governors opposed the Fed's decision in July to hold interest rates steady, the first multiple dissent since 1993. On Wednesday, another dissent faulted the Fed for lowering rates a quarter percentage point, rather than half a point.

Don't be fooled by the drama. In terms of how the Fed manages the economy, it's mostly a tempest in a teapot. Trump has very little leverage over Powell. The Supreme Court has confirmed that the chair can't be dismissed except "for cause" — a threshold that the renovation-cost overruns the president has cited don't meet. Powell intends to serve out his term to May 2026 and possibly stay on further as a governor.

Powell, not Trump, is in control of the Fed.

Whoever succeeds Powell might not obey Trump once in office. If pressed to lower interest rates in clear breach of the Fed's mandate, the chair might refuse — and in any case would have to convince the policy-making committee. Trump probably can't stack the Federal Opinion Market Committee, which sets monetary policy. I'd be surprised if he gets the opportunity to appoint more than two or three members during this presidential term.

The double dissent in July exaggerated the split within the Fed. All 19 members of the FOMC expect to cut interest rates over the next few years, according to their economic projections. They differ only on timing and magnitude. All of the dissents this year should be discounted, given that they're from the only three Trump-appointed members.

The Fed chair's sway over the FOMC is subtle and multi-faceted. The chair sets meeting agendas, chooses the topics (but not the conclusions) of the special staff analyses considered at meetings, sets committee assignments for the Federal Reserve board and controls its staff resources.

When monetary policy differences are modest, members have ample reason to stay on the chair's good side. The more expertise and credibility the chair has, the more they'll be willing to defer. During the dotcom boom of the 1990s, for example, they abided by Chairman Alan Greenspan's judgment that productivity growth would keep inflation in check, because they trusted in his experience as an economic forecaster.

FOMC voters typically do not dissent over differences of timing and magnitude when they agree with the broad direction of monetary policy. More than one or two dissents tends to indicate significant disagreement and can threaten the chair's influence. Rarely would a Fed chair try to force a decision when strongly opposed by more than 2 or 3 members — though this depends on the motivations of the dissenters.

I've been amply critical of the Fed — for its flawed 2020 monetary policy framework and for failing to properly consider the costs and benefits of "quantitative easing," in which the central bank buys government bonds or other assets. But the attacks from Powell's potential successors go too far.

Accusations of mission creep overstate the evidence: The Fed's climate change policy, for example, has remained entirely within its core financial-stability mission, focusing on how natural disasters might precipitate property losses and strand assets. A former Fed governor's call in July for "breaking some heads" to achieve "regime change" is downright mean-spirited, given the commitment of Fed officials and staff to do whatever is needed in terms of time, effort and creativity to achieve the central bank's objectives (a commitment that I witnessed as president of the New York Fed).

The Fed's achievements in stabilizing markets during the 2008 financial crisis and the COVID-19 pandemic, and in bringing down inflation while avoiding recession in recent years, deserve praise rather than disparagement. It'll take a lot more than the latest wave of attacks to undermine the independence crucial to that record.

Dudley is a Bloomberg columnist and former president of the Federal Reserve Bank of New York.