Trump versus the Federal Reserve: Understanding the Coming Confrontation

If Donald Trump wins the 2024 election, he has plans to shakeup the leadership of the Fed. I assess the strength of those ideas - politically, legally - in this deep dive.

Prediction models and markets are calling the 2024 election something of a coin toss, far closer than either 2016 or 2020. The question on everyone’s lips, then, is simple enough: what does this mean for the Federal Reserve?

Okay, probably not everyone’s lips, but more than a few. It has been reported that the Trump campaign is contemplating some serious and unprecedented challenges to the Fed’s governance. In this post, I will talk about two: the idea of a “shadow chair” and whether the President can demote Michael Barr, the Vice Chair for Supervision appointed by Joe Biden but whose four-year term in the role does not expire until 2026.

The Shadow Fed Chair

There is no love lost from Donald Trump for his pick as Federal Reserve Chair. In 2018, then President Trump launched salvos at Jay Powell, publicly pondering whether Powell poses a greater threat to the U.S. economy Xi Ping and comparing him to a golfer who can’t putt. He openly flirted with the idea of firing Jay Powell, something he probably cannot legally do, or at least, do successfully given the many positions that a Fed Chair formally holds. (I wrote about the thorniness of that proposition at the time at Brookings, here.)

The campaign appears to have made peace with the idea that Jay Powell will not leave the scene before the termination of his current term in 2026.

Scott Bessent — an economic adviser to former President Trump described by the candidate as “one of the most brilliant men on Wall Street” — has floated what he views as a resolution to the problem. If candidate becomes president, Donald Trump should immediately announce his appointment to succeed Jay Powell and hope that an acquiescent Senate confirms the nominee to the post a full year before taking the position. The hope would be to render Jay Powell a “lame duck,” powerless at the Fed and in the markets as another inherits the authority of the position before formally occupying the seat.

The nature of Fed power

This idea is too clever by half. It misunderstands the nature of power at the Federal Reserve.

To understand, compare the lame-duck status of sitting presidents when their successor is named (or a campaign for their successor is underway). When Joe Biden announced that he would no longer seek renomination for the office, he almost immediately became a lame-duck president. This is because all eyes were on Kamala Harris and Donald Trump, the ones who will pull those levers of power after their inauguration in January 2025. But the lame-duck status is not a function of the identification of successors, but that the carrots and sticks that a president holds over his coalition (and opponents) over the medium term are no longer his to exercise.

The Fed Chair is a politician par excellence. But the coalitions that he builds are not in the medium term. They are the coalitions between FOMC and Board meetings. The formal legal and moral authority exercised by the Fed chair will always be the authority to stand for the institution and announce, explain, and defend its decisions. There is no lame duck status for the Fed Chair because the power of the office extends to precisely the point of resignation.

Only one Fed Chair at a time

My favorite example of this is the final decision made by then Fed Chair Janet Yellen. Yellen had undergone the Fed reappointment sweepstakes engineered by Trump, what some compared to Trump’s history as a reality TV star treating the Fed like an episode of celebrity apprentice. (Later reporting suggested that Trump was quite taken by Yellen, but that he apparently decided she was too short for the role.

After Powell was named instead, Yellen continued as Chair for several months. And on the night before she stepped down from her post, on February 2^nd, 2018, she signed off on one of the most significant regulatory penalties the Fed has ever imposed, when it capped the assets of Wells Fargo for “widespread consumer abuses” and other compliance breakdowns.

It didn’t matter that Powell was about to take the role from her a few hours thereafter. She was the Fed Chair until the minute she wasn’t. That’s the way power within the Federal Reserve works.

The Vice Chair for Supervision

A harder problem to deal with is the Vice Chair for Supervision, a new position created by Congress in 2010 (as part of Dodd-Frank). Some context on the role is helpful. The post was left unfilled throughout the Obama years for reasons that the former President and his advisers alone can defend. Randy Quarles, appointed by Donald Trump in 2017, became the first Vice Chair for Supervision and led a major revision of the Fed’s regulatory and supervisory efforts during his four-year term. After inexplicable delays, Biden nominated Sarah Bloom Raskin, a former Fed Governor and Treasury official, for the role, but she withdrew in the face of Senate opposition. Michael Barr, a former Treasury official, was named in the summer of 2022 to a four-year term.

The Vice Chair for Supervision is arguably the most important post for financial regulation and bank supervision in American government. The arguable exception is the Fed Chair itself. The contours between the Fed Chair and Vice Chair for Supervision in terms of ultimate responsibility is also contested. By statute, the Vice Chair for Supervision “shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms”.

Demoting Michael Barr?

Andrew Ackerman at the Washington Post has reported that the Trump campaign is contemplating “demoting” Michael Barr from the Vice Chair for Supervision if Trump is elected. I think the policy impulse behind that idea – that Republican presidents elected by the people should be able to appoint Republicans to these key policy roles, and vice versa for Democrats – is a sound one.

That is not, however, the statute that Congress wrote.

As I argued back in 2019, Congress simply didn’t speak clearly about the Fed’s governance and its relationship to the President. Each of the Fed’s three statutory leaders — the Board Chair, Vice Chair, and Vice Chair for Supervision — serve for four-year terms. Those three leaders plus four others constitute together the Board of Governors of the Federal Reserve System, each serving either a full nonrenewable fourteen-year term or the remainder of terms left open upon the resignation of a predecessor. Michael Barr’s leadership post expires in the summer of 2026. His status as a Fed Governor does not expire until 2032.

Removability protection at the Fed

Congress did not identify any removal protection for any of these three leadership posts, beyond naming the length of their term. For the Fed Governors, however, Congress gave them both identified terms – fourteen years – and “for cause” removability protection.

It is not clear to me how this Supreme Court would treat these unique leadership positions. It is possible that they, following earlier precedent, would infer protection for the position based on the identified term alone. It is also possible, following recent precedent, that they would regard these leadership positions as exercising outsized influence over the president in ways that are inconsistent with the separation of powers.

The key point is this: for removability purposes, there is no difference between the statutory role of Fed Chair and Vice Chair for Supervision. If Trump asserts the ability to demote Barr, he has asserted the ability to remove Powell.

Some might argue that the positions are different, because monetary policy deserves extra protection as “independent” but supervisory policy does not, because the latter is necessarily political and the former is not.

Even if we stipulate that contested proposition, it does not apply to this context. The Board Chair is a regulatory and supervisory position. It is not a monetary position at all. The monetary policy analogue to the Vice Chair for Supervision is not the Board Chair, but the Chair of the FOMC. That latter position, by tradition, coincides with the former; but by statute, the FOMC itself chooses its leadership, not the President. This is a one-year appointment, not subject to Senate confirmation, and not obviously removable by anyone.

I think if Michael Barr fights an attempt by Trump to demote him, he will win that fight. I am not certain of it, however. The Supreme Court could extend its recent skepticism of these protections, potentially overruling the cornerstone precedent that has protected commissioners since the Great Depression.

I am certain that the assertion of such power would set an astonishing precedent that would apply not only to the Vice Chair for Supervision but throughout the Fed (and beyond). If Trump succeeded in that effort, thenceforth every president would have the ability to remove all three leadership positions from the Fed on January 21 of a new presidential term. That appointment power is not the only mechanism of Fed independence — but it is one of the most important.

The defensible political instinct behind these moves

Republicans are not the only ones who do not like the idea of partisan hangover in bank regulation. In 2021, Democrats staged an astonishing power grab away from the Republican FDIC Chair, Jelena McWilliams, even going so far as to pretend to issue FDIC requests for comment from the CFPB’s website. Cooler heads prevailed – it was a profile in courage for Acting Comptroller Michael Hsu, whose very appointment to the Comptroller may have been thwarted by his lack of enthusiasm for those legal machinations – and the Democrats very quickly got control over the FDIC.

As it should be. I see no benefit and much harm in having the electorate choose the president only to have that worldview demoted in favor of the politics and values of a defeated predecessor. Republicans’ and bankers’ fights against Basel III Endgame are another example of this bad behavior, as I have written twice before. In my perfect world, Congress would design these political leadership posts to immediately cycle off on inauguration day, giving the president the power to re-assert that leadership.

But there is a difference between what Congress has said in the law and what I think is a good policy or political outcome. I hope the incoming Trump Administration recognizes that key difference. It is the foundation of the rule of law.