The search for two new regional Federal Reserve Bank presidents has launched at a time when some market watchers worry the central bank's independence is eroding under political pressure.

Federal Reserve Bank of Boston President Eric Rosengren and Dallas Fed President Rob Kaplan recently retired after their stock trades in 2020 raised ethical concerns. Rosengren would have become a voting member on the rate-setting Federal Open Market Committee next year. A Fed spokesperson declined to comment on whether the alternate or interim President Kenneth Montgomery would vote instead if Rosengren is not replaced in time.

Whoever takes over at the banks could face unprecedented political pressure, analysts believe.

"The Federal Reserve is in danger of becoming more and more political and we should be worried about that," said Michael Hewson, chief market analyst at CMC Markets.

While presidents have historically selected Fed executives whose beliefs on employment and inflation align with their own, analysts argue that actions under the Trump administration shifted the paradigm.

Mikael Olai Milhøj, chief analyst with Danske Bank, pointed to President Trump's nomination of Judy Shelton, one of his campaign advisers, to the Fed as an example of the executive branch attempting to align the central bank with its own policy priorities. Trump had also planned to pick adviser and former Republican presidential candidate Herman Cain for the Fed.

Shelton, who was criticized over her qualifications for the Fed and her previous support of the gold standard, was ultimately blocked by the Senate. Cain withdrew from consideration.

But Biden could follow Trump's lead as Fed Chairman Jerome Powell's renomination has become less than certain before his term expires in February.

"If Biden removes Powell and chooses his own, just like Trump did, it would become standard for a new president to choose his own," Milhøj said. "That wouldn't be great."

Political pressure

The Fed, which is self-funded and makes policy independent of the White House, faced political pressure during then-President Trump's time in office when he publicly lobbied for changes in Fed policy, including near-zero rates and other efforts he argued would boost the stock market.

Biden has not taken the same path, but Powell's potential renomination has not avoided politics, with Senator Elizabeth Warren, D-Mass., calling the Trump-appointed Fed chairman a "dangerous man to head up the Fed," after she claimed he worked to weaken bank regulations.

Senator Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee, wrote Powell on Oct. 13 urging him to stop any regulatory changes until Biden announces "a slate of Board appointees for upcoming terms." The president could announce as many as four nominations in the next three months.

In a Sept. 28 note, Kathy Bostjancic, chief U.S. financial economist with Oxford Economics, said Democratic lawmakers like Warren and Brown may successfully pressure Biden to replace Powell with a nominee viewed as more progressive.

Outside of Powell's potential replacement, Fed watchers believe the Biden administration, members of Congress and members of the Fed's Board of Governors could seek to influence who fills openings at regional banks, decisions that are required under the Federal Reserve Act to be made by those banks' directors before being voted on by the Fed Board of Governors.

Michael O'Rourke, chief market strategist at JonesTrading, said "political factors are likely to be the primary influence on appointments."

But Tom Essaye, a trader and founder of financial research firm The Sevens Report, pushed against the idea that the Fed was becoming more political, arguing that the central bank's monetary policy has remained free of partisan influence.

Still, Powell has often discussed using monetary policy to challenge income inequality and boost minority unemployment, statements that have been construed as partisan in some circles.

"While it may be a coincidence, those are often repeated talking points of the Democrats, and as such the media is starting to portray him as political," Essaye said. "Certainly Powell has personal political leanings, but I do not think that the FOMC, which has voted unanimously on policy since the pandemic began and is presumably filled with both Republicans and Democrats, has become political in that it favors one party over the other."

The problem, according to Essaye, is that Fed officials are giving so many speeches and holding so many press conferences that their many comments are being interpreted as political.

"The Fed talks too much now," Essaye said. "If the Fed wants to squash commentary that it's becoming more political, the best thing it could do is just stick to commentary on rates and market operations and leave the rest to the remainder of Washington."

Has the Fed actually been independent?

Benjamin Dulchin, Fed Up Campaign director at the Center for Popular Democracy, said claims of political influence at the Fed are hardly new.

"Anytime somebody defends the status quo as, 'We're defending Fed independence,' you should probably arch an eyebrow and be a little bit skeptical," Dulchin said in an interview. "Was the Fed independent when Fed Chair Arthur Burns was bullied by [former President Richard] Nixon to accede to Nixon's political demands?"

Dulchin added that former Chair Paul Volcker was not independent but "an enormously ideologically driven man" and often closely cooperated with presidents on controlling wage increases, and former Chair Alan Greenspan was "arguably not very independent, at least not independent of ideology."

The Fed should avoid appointing executives with backgrounds in private equity and investment banking, according to Carter Dougherty, spokesman for financial market watchdog Americans for Financial Reform.

"Too seldom mentioned in discussions of Fed independence is the need for it to be independent of Wall Street and the industry in general, and the Fed trading and ethics scandal is a symptom of avoiding this issue," Dougherty said in an email.

Fed appointees generate "perhaps the most market-sensitive information in the world. If we want to ensure that the Fed is perceived as making decisions in the public interest, and only in the public interest, then we need to curb the revolving door between the Fed and Wall Street," Dougherty said.

More new voters

Two of the more dovish regional presidents will rotate off as FOMC voting members next year: San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans. They will be replaced by two of the more hawkish ones: Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester, according to Isaac Boltansky, director of policy research and a managing director at BTIG LLC.

Ian Katz, managing director at Capital Alpha Partners LLC, said he thinks the FOMC as a whole is unlikely to be very different in terms of policy, though it could be in terms of demographics.

"There's been a lot of talk and attention in congressional hearings about making the Fed more diverse, and I would expect that it may be more diverse after those two are replaced," Katz said in an interview. "It's an opportunity for the Fed system to put another woman or minority or two in positions of authority and leadership."