Interest Accumulation Over Time: How Principal Amount Grows with Added Interest

In the realm of American politics, the relationship between the President and the Federal Reserve has taken centre stage, with President Trump's actions raising questions about the independence of the 112-year-old institution.

The Constitution empowers and constrains the President, vesting executive power in the President (Article II, section 1) and allowing the President to appoint senior Officers of the United States (Article II, section 2). However, the President's powers are not without limits. Article II, section 3, directs that the President "shall take Care that the Laws be faithfully executed," which allows Congress to limit presidential power by law.

The current debate revolves around the Court's accommodating approach to President Trump's actions, which has sparked speculation about the Court validating Trump's firing of Fed governors. Dr. Lisa Cook, a former Fed governor, has filed a lawsuit against her dismissal by President Trump and is seeking a temporary injunction to reverse her removal and secure her position as a member of the Federal Reserve Board. This case is seen as pivotal for the independence of the Federal Reserve.

The Court's stance towards the Federal Reserve has been somewhat ambiguous. It appears to suggest that the Fed's delegation of public power to private businesses is not a constitutional defect but rather a reason for exemption from the rules it applies to other agencies. However, in recent years, the Court has sought to narrow agencies' independence, refusing to allow limits on presidential removal authority for the single head of an agency and rejecting restrictions on presidential removal of the single director of an agency overseeing government mortgage financing agencies.

The Federal Reserve, unique among executive agencies, is a highly decentralized body, governed by regional Federal Reserve Banks, which are partially controlled by private banks. The Federal Open Market Committee (FOMC) sets interest rates for the Federal Reserve. The FOMC consists of seven presidentially appointed governors, the president of the Federal Reserve Bank of New York, and a rotating slate of four regional Federal Reserve Bank presidents.

Lower interest rates, as proposed by President Trump, could significantly lower debt-service costs and make his legislation look less irresponsible. However, plausible proposals to cut interest rates might gain some regional bank presidents' support, but cuts of the magnitude Trump has demanded would require him to capture every seat on the Board.

The Supreme Court has not applied its ruling on the MSPB and NLRB cases to the Federal Reserve. The Court has, however, allowed restrictions on firing special prosecutors appointed to investigate senior political officials and sustained limiting the removal of members of a commission establishing guidelines for criminal sentences.

President Trump's firing of Dr. Cook is seen as a demand for the Supreme Court to "swallow its words" regarding the protection of Fed governors' tenure. President Trump has appointed two loyal governors from his first term and will soon have a third. He will also appoint Chairman Powell's successor next year. President Trump's business model has a strong personal interest in lower interest rates.

Critics argue that President Trump's criticisms of the Fed and his removal of Fed governors who do not bow to his will could contribute to a reluctance to invest in the U.S. and rob the Fed of credibility in a crisis. Countries' economies perform better with an independent central bank than one perceived to be beholden to political leadership.

As the legal battle unfolds, the independence of the Federal Reserve and the limits of presidential power are issues that will continue to be hotly debated. The outcome could have significant implications for the U.S. economy and the role of the Federal Reserve in shaping monetary policy.