The next president of the United States will wield enormous influence over U.S. monetary policy, perhaps even more so than presidents past.
"This is an extraordinarily important election for the future of the Fed," said Peter Conti-Brown, assistant professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania. "It may well be the most important election in the Fed's history."
Donald Trump or Hillary Clinton will likely get to nominate at least two of its Board of Governors members and decide whether to reappoint current Chair Janet Yellen in early 2018.
There are typically seven Fed governors; however, for more than a year, there have only been five. President Barack Obama nominated Hawaii banker Allan Landon and University of Michigan economist Kathryn Dominguez to the vacancies in 2015, but Congressional approval has been a non-starter. Senate Republicans have declined to consider Obama's nominees, citing his refusal to appoint a vice chair for supervision at the Federal Reserve -- a position created under Dodd-Frank. Fed board member Daniel Tarullo has filled the role since 2010.
Yellen has pushed Congress to act on the matter, but a political stalemate means neither Obama nominee is likely to be confirmed. Instead, it will be his successor who addresses it.
New Fed Board Members
The first thing the next president will have to do in regards to the Fed is fill the empty board of governors seats. Clinton could opt to stick with Obama's elections or choose new nominees of her own. Trump would almost certainly nominate new picks.
The Federal Open Market Committee (FOMC) -- the policy-making body of the Federal Reserve System -- is comprised of 12 members: seven governors and five of 12 reserve bank presidents (the president of the Federal Reserve Bank of New York and four others who rotate on a one-year basis). With the board of governors staffed at limited capacity, more power lies with the reserve bank presidents, who are appointed by each reserve bank's board of directors.
"It should mean that the board of governors on the FOMC enjoys a seven-to-five majority, this is important for democratic legitimacy," said Conti-Brown. "Having more vacancies on the board of governors means that these privately-appointed reserve bank presidents can have a majority, and that really shapes the way that monetary policymaking is done."
The boards of directors that select the regional Federal Reserve bank presidents are chosen, in part, by the banking industry, which for some is cause for concern, especially when the board of governors is not fully staffed. Clinton spokesman Donte Donald said in an email to TheStreet that Clinton has pledged to increase diversity within the Fed and remove bankers from such boards, but experts say that this would not be within her capacity as president. It would require legislation, which, given the current state of Congress, seems unlikely.
Donald said Clinton has promised to appoint governors who "share the belief that maximum employment is an essential prong of the Federal Reserve's dual mandate." In other words, those with a more dovish tilt, inclined to keep interest rates low as a way to grow the economy, instead of more hawkish types focused on price stability and therefore more inclined to raise rates.
"I wouldn't expect much change from Clinton to Obama given how loose monetary policy and how accommodative monetary policy has remained all these years," said Sarah Binder, professor of political science at George Washington University and senior fellow at the Brookings Institution.
It's less clear what Trump might do. The real estate magnate has admitted that as a businessman and developer he "love[s]" low interest rates. Conversely, he has said on more than one occasion that the market is in the midst of a bubble and he has accused the Fed of keeping rates artificially low.
His changing take on the Fed appears to be tied to personal convenience, not policy -- as a developer, he prefers a dovish approach, and as a presidential candidate in 2016, he leans towards hawkishness. And if he's elected, it could change again, warned Conti-Brown.
To be sure, there are no guarantees that either Clinton or Trump would be successful in getting their nominees approved by the Senate, especially if their respective opposing parties are in charge. While the Fed can still operate with fewer-than-prescribed governors, such a scenario is not optimal.
"These vacancies are not good. Another vacancy would be problematic. Two more vacancies would grind it to a halt," said Conti-Brown.
What Will Happen to Yellen?
Presidents in recent history have opted to reappoint the chairmen selected by their predecessors, even those of opposing parties. Paul Volcker served under Presidents Jimmy Carter and Ronald Reagan, Alan Greenspan under Presidents Reagan, George H.W. Bush, George W. Bush and Bill Clinton, and Ben Bernanke under Presidents Bush and Obama.
Whether Yellen will remain on during the next administration largely depends who is nominated.
"With Clinton in the White House, assuming Yellen wanted another term, I'm all but certain she'd get re-nominated," said Binder. "If we were living in the world of a Trump presidency, I would think there would be a different chair nominee."
Trump has railed against Yellen on more than one occasion on the campaign trail, accusing her of holding interest rates artificially low in order to help Democrats. He reiterated the theory at the first presidential debate, accusing the Fed of "doing political things" and specifically name-checking Yellen. "The day Obama goes off, and he leaves, and he goes out to the golf course for the rest of his life to play golf, when they raise rates, you're going to see some very bad things happen, because the Fed is not doing their job. The Fed is being more political than Secretary Clinton," he said.
Whoever wins in November, the Federal Reserve will likely face changes from the new administration as well as the Senate. And it might be in for a wild ride. For instance, Trump appears uninterested in following the tradition of the president refraining from commenting on monetary policy.
"Four years from now, when his reelection is up, if the Fed is making moves that could threaten the economy, then we would see President Trump exercising significant power and authority to bully the Fed into submission," said Conti-Brown.
The Longer Picture
"On some level, whoever wins the election, they're going to be largely in favor of the Fed continuing to be very accommodative," said Andrew Huszar, senior fellow at Rutgers University Business School and former Federal Reserve official.
The institutional history of the Fed's approach over the past 30 years won't be easily forgotten. Instead, he believes the greater risk to the body and its independence is in the longer term.
Republicans and Democrats have become increasingly critical of the Fed in recent years -- the former accusing it of being overly accommodative and activist in keeping interest rates low, and the latter worrying it will raise rates and questioning its oversight of the financial industry. And if the Fed continues on its path of playing a more active role in shaping the economy, when another crisis arrives, it may be a perfect storm for Congress to act against it.
"It may be getting to the point where, longer-term, it may ultimately lose its independence," he said. "And that's a really bad thing for the American economy."