President-elect Donald Trump’s return to the White House had already suggested major changes for the Federal Reserve. Now, however, an even bigger question is emerging—not just how the central bank will function under Trump, but whether it will continue to exist at all. Elon Musk, a prominent Trump supporter anticipated to significantly influence Trump’s policies, added a “100” emoji to a repost by Republican Sen. Mike Lee of Utah on X, where Lee advocated for abolishing the Fed. “The Executive Branch should be under the president’s control,” Lee stated in his post on X on Thursday, shortly after Fed Chair Jerome Powell told reporters he would not resign if Trump requested it. Lee continued, “The Federal Reserve exemplifies one of the ways we’ve strayed from the Constitution in this respect,” adding, “This is another reason we should #EndTheFed.” When asked about Trump’s position on the issue, Trump-Vance transition spokesperson Karoline Leavitt told CNN, “Policy should only be considered official if it comes directly from President Trump.”
It’s evident that the days ahead will likely bring increased scrutiny and challenges for the Federal Reserve, with debates on its structure and independence gaining more attention. To fully understand the implications, however, it’s essential to grasp what the Fed is. The next sections will explain that.
The Fed
The Federal Reserve System, often simply called “the Fed,” is the central bank of the United States, established to provide the country with a safe, flexible, and stable monetary and financial system. Formed in 1913 in response to financial panics that periodically destabilized the economy, the Fed’s roles and responsibilities have evolved, becoming integral to economic policy in the U.S. and globally.
Structure of the Federal Reserve System
The Federal Reserve System has a unique structure that combines elements of both government and private organizations. It consists of three key components.
The Board of Governors
Located in Washington, D.C., the Board of Governors is the central body of the Fed, composed of seven members appointed by the President and confirmed by the Senate. Each member serves a 14-year term, ensuring stability and insulation from short-term political pressures. The Board of Governors oversees the Federal Reserve Banks and plays a crucial role in formulating monetary policy.
The 12 Regional Federal Reserve Banks
The Fed is decentralized, with twelve regional banks across major U.S. cities. These banks operate semi-independently and serve as the operating arms of the central bank, carrying out the Fed’s day-to-day activities such as implementing monetary policy, providing banking services, and monitoring local economic conditions.
The Federal Open Market Committee (FOMC)
The FOMC is the Fed’s chief policymaking body for monetary policy, particularly regarding interest rates and the money supply. It consists of the seven members of the Board of Governors and five regional bank presidents, with the New York Fed president holding a permanent seat. The FOMC meets regularly to set the federal funds rate, which impacts overall economic activity.
Core Functions of the Federal Reserve
The Federal Reserve System has four primary functions that are essential to maintaining economic stability in the U.S.
Conducting Monetary Policy
The Fed’s most prominent role is to manage the nation’s monetary policy, which involves influencing the supply of money and credit to promote stable prices, moderate long-term interest rates, and maximize employment. The FOMC sets the federal funds rate, the interest rate at which banks lend to each other overnight. By raising or lowering this rate, the Fed can control borrowing costs, influence consumer spending, and affect overall economic growth.
Promoting Financial System Stability
The Fed monitors and addresses risks to the financial system to prevent crises. Following the 2008 financial crisis, the Fed’s role in ensuring stability expanded significantly. It now actively supervises large financial institutions to prevent systemic risks that could trigger economic downturns. During times of crisis, the Fed may act as a “lender of last resort,” providing emergency loans to prevent financial institutions from collapsing.
Supervising and Regulating Banks
The Fed supervises and regulates a broad range of financial institutions, focusing on ensuring safe and sound banking practices and protecting consumers. Through its supervisory powers, the Fed examines banks for compliance with laws and regulations, working to prevent excessive risk-taking that could endanger the broader economy.
Providing Financial Services
The Federal Reserve also acts as a bank for the U.S. government, offering services to the U.S. Treasury, financial institutions, and foreign entities. It processes payments, including check clearing and electronic funds transfers, and manages currency distribution. The Fed also plays a role in developing and overseeing the U.S. payments system, which has grown significantly in recent years due to advancements in technology.
How the Federal Reserve Influences the Economy
The Federal Reserve influences the U.S. economy primarily through its control over interest rates and the money supply. Here’s how its actions ripple through the economy.
Interest Rates and Economic Activity
By setting the federal funds rate, the Fed influences borrowing costs. Lowering interest rates makes loans cheaper for individuals and businesses, encouraging spending and investment. Conversely, raising rates can slow borrowing, reducing spending and cooling inflation. This mechanism allows the Fed to moderate economic fluctuations.
Open Market Operations
The Fed buys or sells government securities to control the money supply. By buying securities, the Fed injects money into the banking system, encouraging lending. Selling securities has the opposite effect, draining funds from banks, making borrowing more costly, and slowing the economy. Open market operations are the Fed’s primary tool for short-term economic adjustments.
Quantitative Easing and Crisis Measures
During crises, such as the 2008 financial crisis and the COVID-19 pandemic, the Fed has used unconventional tools like quantitative easing (QE), buying massive amounts of government and mortgage-backed securities to inject liquidity into the economy. These measures help stabilize markets, lower long-term interest rates, and support economic recovery when traditional tools are insufficient.
Calls to End the Fed Are Not New
The idea of abolishing the Federal Reserve isn’t recent. Former congressman Ron Paul, who ran for president as both a Libertarian and a Republican, published a book in 2009 titled End the Fed, advocating for the elimination of the central bank. More recently, in June, Republican Representative Thomas Massie of Kentucky and Senator Mike Lee introduced bills aimed at dismantling the Fed and transferring its functions to the Treasury Department.
Trump’s Position on the Fed’s Future
So far, Trump has not openly supported abolishing the Fed. However, on the campaign trail, he has proposed significant changes to the Fed’s policies, which has raised concerns among economists. Trump has spoken about altering the Fed’s rules and adjusting interest rates, particularly promising to “bring interest rates way down,” a claim he made in August at the National Association of Black Journalists’ annual conference.
Challenging the Fed’s Independence
For over 70 years, the Federal Reserve has operated independently, setting interest rates to support its mandate of price stability and maximum employment. This independence allows Fed officials to make decisions without political interference, even if those decisions are unpopular. Recently, the Fed kept interest rates at a two-decade high to control inflation, only lowering them when inflation neared its 2% target.
During his first term, Trump criticized Fed Chair Jerome Powell and threatened to remove or demote him, blaming Powell for maintaining high-interest rates. Trump also suggested he might require Fed officials to consult with him on rate decisions, a move that could increase political pressure on the Fed and potentially destabilize inflation control efforts.
Legal and Practical Constraints on Changing the Fed
Trump’s ability to restructure the Fed’s independence or remove its appointees is legally uncertain. According to the Federal Reserve Act, the Fed Chair can only be removed “for cause,” though what qualifies as cause isn’t explicitly defined. When asked about this possibility, Powell, a lawyer himself, confidently responded that it was “not permitted under the law,” emphasizing the Fed’s legal protections.
Testing the Waters in 2025
If Trump seeks to challenge the Fed’s autonomy, 2025 could provide a strategic moment. With Republicans holding a majority in the Senate and six of nine Supreme Court justices appointed by Republican presidents, Trump might find support for his initiatives. However, recent Supreme Court rulings show that challenging independent agencies isn’t always successful. For instance, the Court ruled in favor of preserving the Consumer Financial Protection Bureau, and last month, it declined to hear a case aimed at dismantling the Consumer Product Safety Commission—both examples reinforcing independent agency protections similar to those of the Fed.
Conclusion
The Federal Reserve System is a complex institution that plays an essential role in managing the U.S. economy and, by extension, influences the global financial landscape. Through its monetary policy, regulation of financial institutions, and crisis management, the Fed works to ensure economic stability and growth. While its influence and actions are sometimes controversial, the Fed’s role in stabilizing the economy remains crucial, particularly in times of uncertainty. As the world economy becomes more interconnected, the Federal Reserve’s decisions will continue to reverberate across borders, impacting economies worldwide.