Analysis of the Stability of the Fed Chair Position: Legal and Institutional Safeguards

The stability of the position of the Fed Chair has always been a focal point of market attention. Despite political pressure, multiple legal and institutional safeguards make the position of the Fed Chair relatively stable.

Legal Protection

The Federal Reserve Act stipulates that Fed board members can only be removed for "just cause," which is generally understood as misconduct or dereliction of duty, rather than policy disagreements. A Supreme Court case in 1935 further established the principle that heads of independent regulatory agencies cannot be dismissed arbitrarily for policy differences.

Recently, the Supreme Court specifically mentioned that the Fed is a "structurally unique quasi-private entity" in a ruling, which opens up a special status for the Fed, protecting its board from "arbitrary dismissal." Even if someone attempts to dismiss the Fed Chairman for "just cause," the lack of historical precedent could lead to lengthy legal proceedings.

Protection of System Design

The institutional design of the Fed itself limits the direct influence on monetary policy. The Federal Open Market Committee (FOMC) is composed of 12 members, and this structure decentralizes decision-making power, making it difficult to immediately change policy direction even if some personnel are replaced.

The term for a Fed board member is 14 years, while the chairman's term is 4 years. Even if the chairman is removed from office, he can still remain as a board member and may even be elected as the committee chairman by the FOMC, thus maintaining actual leadership in the formulation of monetary policy.

The Importance of Independence

Economists generally believe that separating monetary policy from the political cycle is beneficial. International evidence suggests that central banks with greater political independence tend to promote lower and more stable inflation. Historical records show that political interference led to poor monetary policy in the late 1960s and early 1970s, with adverse consequences for the development of inflation.

Any weakening of the Fed's independence could increase upside risks to the inflation outlook. Additionally, market participants may demand greater compensation for inflation and inflation risks, which could drive up long-term interest rates, dampen economic activity prospects, and worsen fiscal conditions.

Overall, despite political pressure, the legal and institutional framework provides multiple protections for the Fed Chair, making the position relatively stable. This stability is crucial for maintaining the independence of monetary policy and the long-term healthy development of the economy.