Can the President Fire a Fed Governor?

 

Whew — that was close. 

In Trump v. Cook, the Supreme Court ruled 5–4 that President Trump cannot fire Fed Governor Lisa Cook. If one justice had ruled otherwise and the Court instead held that the president may remove a Fed governor for any reason at any time, financial markets would likely have reacted with real turmoil. There is little doubt Trump would have immediately fired Jay Powell, Lisa Cook, Michael Barr, and Philip Jefferson. Interest rates would have jumped, stocks would have sold off, and the dollar would have fallen sharply on world markets.

I recall an earlier episode when the Open Market Committee once voted against the chairman, markets tanked in response. That reaction would look mild next to what a single flipped vote in this case could have unleashed. A ruling for Trump would have ended the Fed’s independence. Any new Trump appointees might not even have secured Senate confirmation — and if they had, they would have been widely seen as presidential cronies. Then, when another president took office, that president would likely have fired all of Trump’s appointees and installed a new set of loyalists. And when the terms of the regional reserve bank presidents all expired in February 2031, a reconstituted board could have fired them as well. Then the president would have complete and total control of the nation’s central bank.

Trump has consistently pushed for a 1 percent interest rate even in the face of elevated inflation. A Trump-dominated Fed would have delivered that, and likely more. What would that have meant for rates and inflation? Every president wants lower rates and easier money, especially heading into an election year.

So that one vote likely spared us a period of economic chaos and inflation approaching levels we associate with some of our South American neighbors.

Again, whew!

The Case for “Cause”

Trump maintained that Cook was being fired “for cause,” citing an allegation of mortgage fraud. The Court initially held that Cook could not be removed without a chance to respond to that allegation and allowed her to remain at the Fed while the matter is litigated. Presumably, if the allegation were proven, she could then be removed. As I noted earlier, Trump wanted to fire Cook “be-cause” — not “for cause” — but because he wanted control of the Fed.

As in the companion Slaughter case, the Court split along similar lines, with the president prevailing there by a wider margin. In Slaughter, the three liberal justices voted against expanding presidential removal power, joined by Chief Justice Roberts and Justice Kavanaugh. Under the Slaughter ruling, the president can now fire any presidential appointee of any independent agency for any reason — except at the Fed, where cause must exist and, presumably, be proven. Trump has said he will continue seeking Cook’s removal.

Why the Fed Is Different

The Chief Justice warned that without such constraints, “any perceived or alleged misstep — past or present — could provide a ready pretext for a Governor’s removal,” a risk that would weigh on a governor as he or she decided what to say and how to vote. But the same logic could just as easily have applied in Slaughter. So what makes the Fed different?

The Chief Justice pointed to the Fed’s unique role in conducting monetary policy, invoking the tradition of the First and Second Banks of the United States, which Congress chartered partly to regulate the currency. Justice Thomas countered that those early banks “possessed no sovereign power,” whereas today’s Fed wields substantial executive authority over the regulation of financial institutions. On this point, Roberts and Kavanaugh seem inconsistent with their own reasoning in Slaughter. My own read is that much like the three liberal justices in Slaughter, Roberts and Kavanaugh were voting against handing this much power to Trump specifically — and not ruling strictly on constitutional grounds.

Justice Gorsuch had the more principled position. He voted consistent with the law as written and if Congress were unhappy with the result, it is Congress’s job to change the law. Gorsuch noted that Congress might never have delegated so much authority to agencies like these “had it known that the President would come to control them.” The 1935 Humphrey’s Executor precedent, he argued, made independent agencies more attractive vehicles for delegated power precisely because presidents could not easily reach them — a dynamic that produced a steady accumulation of power in an alphabet soup of administrative agencies that write and enforce law. Gorsuch called on Congress to reclaim its legislative authority and on the Court to revive its long-dormant non-delegation doctrine, which holds that Congress cannot hand off its core legislative powers to another branch, or to a private entity, without an “intelligible principle” guiding that delegation.

A Cleaner Fix

Gorsuch is right and the underlying dilemma has a fairly clean solution — one I’ve been proposing for fifty years: split the Fed into two distinct bodies. The first would handle monetary policy, staffed by governors with genuine expertise in monetary economics. At the moment, Christopher Waller is the only sitting Fed governor who fits that description. The second body would handle the Fed’s regulatory functions and could be staffed by the remaining current governors. Monetary governors would be removed only for cause, as today. Regulatory governors could be removed for any reason, consistent with the standard now applied to other “independent” agencies under Slaughter. That would preserve Fed independence in monetary affairs and allow markets to rest easily.