Musical chairs: Understanding the history of Fed chair selection

After months of speculation about who will replace Federal Reserve Chair Jerome Powell when his term expires in May, President Donald Trump announced last week that he was nominating former Fed Governor Kevin Warsh for the role. 

If confirmed, Warsh would become the 17th chair of the U.S. central bank, which is one of the most influential economic policy positions in the world. 

President Trump has made it clear that he wants the Federal Reserve to lower interest rates. He has also taken unprecedented steps to exert pressure on the agency, such as repeatedly threatening to fire Jerome Powell and attempting to remove Federal Reserve Governor Lisa Cook from her post. Just last month, the Trump administration’s Department of Justice launched a criminal investigation of Jerome Powell, marking the first time in history a sitting Fed chair has been the subject of such a probe. 

“We've never seen anything like what Donald Trump has done in the previous year to the Federal Reserve,” said Peter Conti-Brown, an associate professor of financial regulation at the Wharton School of the University of Pennsylvania. “And therefore, we've never seen anything like a nomination coming out of the context of this assault.”

As we’ve covered on “Marketplace,” Federal Reserve independence is a key tenant of U.S. central banking. But there is a long history of presidents trying to make their mark on the economy through their selection of new Fed chairs. 

“One of the most significant examples of a new Fed Chair being chosen by the president, and marking sort of a dramatic shift in Fed policy, is President Nixon's choice of Arthur Burns,” said Eric Hilt, professor of economics at Wellesley College.

“Arthur Burns was someone who had known President Nixon through various phases of his career,” said Jennifer Burns, a professor of history at Stanford University. 

Burns became Fed chair in 1970. By 1974, the interest rate was 11%. But Nixon put pressure on Burns to keep interest rates low.

“Which had the unfortunate effect of really helping inflation become more entrenched in the economy and more sustained,” said Jennifer Burns. 

It took a new Fed Chair, Paul Volcker, to take those painful steps of hiking interest rates to 20% to get inflation back down. 

Other presidents have walked right up to the line.

“George H. W. Bush made quite a show of antagonizing the Fed during the 1988 presidential election, and really viewing Alan Greenspan as keeping interest rates too high,” Conti-Brown said. “It's the dog that didn't bark, though, because who did he nominate when he had his one choice? He renominated Alan Greenspan, the person that he seemed to be, you know, most skeptical of.”

Today, the Federal Reserve is even more important in economic policymaking and bank regulation than during previous Fed Chair transitions. We’ve had the COVID pandemic, which solidified the Fed’s role as a lender of last resort. 

“And that’s why the stakes are so high,” Conti-Brown said. “If we get a situation where the Federal Reserve is just looking to the Oval Office for the direction on interest rates, well that's an experiment that has been run many times before, just not in the United States, and the result is hyperinflation.”

“If history teaches us anything, it's that having an independent fed and nonpartisan, independent Fed chair is very important and very valuable economically,” Hilt said. “And I fear that we may lose that.”

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