East Asks | Why can the Federal Reserve, whose Chairman Powell is under criminal investigation, still affect global nerves with its "interest rate hikes" and "interest rate cuts"?

BEIJING, Jan. 12 (Xinhua) -- U.S. federal prosecutors have launched a criminal investigation into Federal Reserve Chairman Jerome Powell, according to foreign media reports. This has quickly shaken U.S. political and market circles, and brought discussions about the nature and functions of the Federal Reserve and its relationship with the White House to the forefront.

The US "central bank," a hybrid public-private partnership.

The Federal Reserve System (Fed) was established by the Federal Reserve Act of 1913. Its core missions include maintaining price stability, maximizing employment, and maintaining the stability of the financial system.

However, it is not a purely government agency, as its structure has a "public-private hybrid" character.

The Federal Reserve consists of the Board of Governors and 12 regional Federal Reserve Banks. The former is a federal government agency, with its seven governors nominated by the president and confirmed by the Senate, and is responsible for policy and oversight. The latter are located throughout the country and are more like private institutions, owned by their respective regional member banks (private commercial banks) and performing operational functions within their jurisdictions.

In addition, the Federal Reserve also has a Federal Open Market Committee (FOMC). The FOMC consists of 12 members, including 7 Federal Reserve Governors and 5 presidents of regional Federal Reserve Banks (who take turns serving in this role).

In response to the frequent bank panics of the early 20th century, the U.S. Congress established the Federal Reserve to address bank runs and financial turmoil. This "public-private hybrid" structure aims to balance federal power with regional interests, and professional governance with political accountability. This design grants it decision-making independence, but it also frequently embroils it in power struggles.

Interest rate hikes and cuts have global repercussions.

Did Powell say "good afternoon" or "hello everyone"? This kind of information can trigger wild fluctuations in global financial markets, as it hints at a potential interest rate hike or cut by the Federal Reserve. What kind of interest rate could possibly influence global markets?

The Federal Reserve typically determines its monetary policy stance through the Federal Open Market Committee (FOMC), and one of its policy tools is adjusting the target range for the federal funds rate. The terms "rate hike" and "rate cut" refer to adjusting the federal funds rate.

The federal funds rate, as the benchmark for short-term interest rates in the United States, affects interbank lending costs, commercial bank lending rates to businesses and households, and the pricing of assets such as bonds and stocks. Generally, rising interest rates suppress demand and reduce inflationary pressures, while falling interest rates stimulate economic activity. Due to the central role of the US dollar in the international trade and financial system, and the large amount of cross-border debt and assets denominated in US dollars, changes in the Federal Reserve's interest rates have significant spillover effects globally through channels such as exchange rates, capital flows, external debt costs, and global risk premiums.

The FOMC holds eight meetings annually to determine the benchmark interest rate, which is then implemented through tools such as open market operations, the discount window, and reserve requirements.

This is why every policy consultation, presidential speech, and policy outlook is closely watched by the world.

Does the president not have the power to remove the chairman?

In the U.S. system, Federal Reserve Board board members serve 14-year terms and are generally not eligible for re-election; of the seven board members, one is appointed by the president as chairperson for a four-year term, which is also eligible for re-election. This design is precisely to prevent the president from manipulating the board.

Legally, the Federal Reserve Act provides a "for cause" protection for governors, meaning the president cannot arbitrarily remove a sitting governor due to policy disagreements. However, the legal details and judicial interpretations are not without controversy: how is "for cause" defined? Can the president exert pressure through procedural maneuvers? In recent years, the debate over whether the president can remove a Federal Reserve governor or chairman has highlighted the ambiguities in the system.

No Federal Reserve chairperson has ever been removed from office in U.S. history. The president can adjust personnel by not nominating a successor or by nominating a replacement. In 2018, Trump broke with decades of precedent by not nominating Janet Yellen for re-election and instead nominated Jerome Powell.

How can the differences between Trump and Boris Johnson be resolved during their "account reconciliation"?

During his two terms, Trump repeatedly criticized Powell on social media and in public, and even publicly threatened to remove or replace him as chairman in 2018.

The root of the friction between the two sides may lie in their fundamental differences in stance—Trump has repeatedly and publicly called on the Federal Reserve to adopt a more accommodative monetary policy to support economic growth, which is seen as ultimately in his political interest. Powell and the FOMC, on the other hand, emphasize independent decision-making based on data, prioritizing inflation and financial stability.

The recent controversy surrounding the massive renovation of the Federal Reserve's Washington headquarters has become a new flashpoint. The White House and executive branches have questioned the project's costs and transparency, linking it to criticisms of Powell. The U.S. Department of Justice's investigation into related testimony and expenditures has been described by Powell as "political coercion."

On November 11 local time, the Federal Reserve published a video statement by Powell on its official website. The statement said that the threat was because "the Federal Reserve always sets interest rates based on the best judgment of the public interest, rather than blindly following the president's personal preferences."

Trump subsequently denied any connection to the Justice Department's subpoena to the Federal Reserve, stating that he "knew nothing about it."

It is worth noting that even if the Federal Reserve Chair's term expires or they are removed from office, the influence of the Board of Governors and internal FOMC procedures on the direction of monetary policy will still exist—meaning that simply changing individual positions is insufficient to completely alter the course of monetary policy, especially given the multiple checks and balances within the Board of Governors and between the Board and regional Federal Reserve Banks. (End)