Because of a quirk in the law, Fed Chair Janet Yellen and Vice Chairman Stanley Fischer can thwart President-elect Donald Trump's ability to reshape the central bank.
There's no indication they want to do this, and Fed tradition would dictate that they won't. More so, it's likely that Trump will have the opportunity to dramatically reshape the makeup of the Fed, although it's unclear toward what end.
But it's a curious part of the Federal Reserve Act, that, in at least some respects, it's up to Fischer and Yellen, and the choice may not be as easy as a decision to follow tradition or not.
Yellen's four-year term as chair ends in February 2018. But Yellen simultaneously (like all chairs and vice chairs) is also a governor of the Federal Reserve Board. Her 14-year term as governor doesn't expire until 2024. Fischer's term as vice chairman expires in June 2018, but his term as a governor continues until 2020.
So, like guests who wouldn't leave, Yellen and Fischer can hang around on the board until their governorships expire, even while they are no longer chair and vice chairman. This would limit Trump's ability to remake the board because, by law, there can be only seven governors.
There are currently two open slots, as the Senate refused to confirm two nominees by President Barack Obama. Trump will get to fill those seats and he might consider one of them as a chair.
But the question is whether he gets another two appointees, giving him four, or a clear majority, of the seven? It's up to Yellen and Fischer.
Vince Reinhart, chief economist at Standish Mellon Asset Management and a former senior staffer at the Fed, thinks the two will follow tradition and step down.
"You don't want to go down in history with an asterisk next to your name,'' Reinhart said. He added that Trump is also likely to appoint a vice chair for supervision of banks (again, this comes from among the seven board members), and this could precipitate the resignation of Fed Governor Daniel Tarullo, who has been playing this role de facto. Reinhart thinks Tarullo won't stick around while his work creating the rules on Dodd-Frank is potentially amended or dismantled.
So, the law provides for the possibility that Trump's influence on the Fed could be muted. But tradition suggests it's more likely to be profound, giving him as many as five appointees.
And yet profound toward what ends is unclear. Trump has said he likes low rates and most presidents tend to support them. But he accused the Fed during the campaign of keeping rates low for political reasons (to help Obama) and said that markets were in a bubble because of Fed policy. The possibility that Trump could enact big tax cuts and government spending programs that run up large deficits could put him in conflict with the Fed if inflation takes off. They could need to raise rates more than they now forecast.
Yet the Fed's low-interest rate policies have come under withering criticism from Republicans. GOP favorites to head the Fed have focused on what are termed "hard-money" economists, such as Stanford Economist John Taylor. He has advocated for higher rates and a rule-based system for setting monetary policy.
While Yellen is likely to resign if not reappointed as chair, should she consider staying on as a governor? The Federal Reserve Act, which created the Fed, would appear to have a rationale for giving governors 14-year terms. It's not quite the implied (but not explicitly stated) lifetime term of a Supreme Court justice in the Constitution, but it's long enough to insulate policymakers and the board from politics.
Yellen and Fischer could decide that they would be following the spirit of the Federal Reserve Act by remaining, arguing that thwarting a president's ability to stack the board is precisely in keeping with Congress's original intent.
The risk is that if Congress doesn't like their decision, it could simply amend the Federal Reserve Act. Yellen and Fischer would then be responsible for precipitating a change in the laws governing the Fed that could have far-reaching unforeseen consequences for the Fed's independence. Congressional Republicans already support a bill to reform various aspects of the Fed.
But for Yellen, staying does have precedence. In 1948, Marriner S. Eccles was replaced as chair by Thomas McCabe and stayed on as a governor until 1951. Reinhart said the history inside the Fed is that it was very confusing "because staff and policy members called both of them chair."