In the summer of 2016, I wrote in Fortune that then-candidate Trump was “the single-biggest challenge to [Fed independence] in recent memory,” and that his challenge was transparent: “this wolf comes as a wolf,” I wrote, invoking Justice Scalia. The reason is simple: Trump cannot abide separate centers of power, and he relishes tearing down institutional credibility if it suits him to displace blame to others or claim credit for himself.
We saw a hint of this a few weeks ago when Trump violated the Rubin Rule, the idea that a president should not comment on Fed policy. And now he is making clear that he won’t hesitate to express his disappointment–and maybe more–to Fed Chair Jerome Powell if the Fed’s central bankers don’t give him the interest rates he thinks he deserves. The Fed isn’t powerless in this pas de deux, but it isn’t a fair fight. The Fed loses even by winning because it loses by engaging at all.
That fights over Fed independence are more about politics, traditions, norms, and evolution than fixed legal determinations is the argument I made in The Power and Independence of the Federal Reserve. But as I argued then, law is not irrelevant, and here the legal questions are interesting and unsettled. They are: what authority if any does the President have to remove Powell from his position should he disagree with the FOMC’s trajectory in decision making?
The Federal Reserve Act is not silent on the question of removal. In a long sentence added in the Fed’s wholesale reform in 1935, Congress clarified the terms of service for members of the Fed’s Board of Governors. Each member was to “hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.” 12 USC 242. But there are two questions left unanswered by the Act. First, what does “for cause” mean? And second, what does protection for the Governor have to do with the Fed Chair?
On the first point, statutory silence does not mean legal silence. Courts have elsewhere added definitional meat to a “for cause” bone by saying it means “inefficiency, neglect of duty, or malfeasance in office,” but this is by no means invulnerable to revision. This is an old standard, made famous in the New Deal when Roosevelt attempted to remove (unsuccessfully) a man named Humphrey from his post at the Federal Trade Commission because of policy differences (Humphrey died while litigation was pending, so his executor continued it; hence the name of the case and the removal standard it articulated, Humphrey’s Executor).
That might settle the question, but the issue of defining “for cause” removability is a live one. Recall the ongoing controversy regarding the CFPB’s structure. Judge Griffith on the DC Circuit, in joining the majority in PHH v. CFPB, opined that Humphrey’s Executor standard provides “only a minimal restriction on the President’s removal power, even permitting him to remove [the CFPB Director] for ineffective policy choices.” This broad interpretation was hotly contested by Judge Griffith’s colleagues on that court, but would it succeed in litigation if Powell were to push it? I doubt it very much, but the Supreme Court can be surprising when it comes to these constitutional and statutory principles of the administrative state.
This much we do know: every time the Court weighs in on removal questions, it spends a lot of time in the institutional architecture of the agency in question. It wouldn’t be different for a legal challenge to the Fed, which makes me think–given these long traditions of Fed independence–that challenging Governors would be on stronger ground than a CFPB Director, a member of the Public Company Accounting Oversight Board, or the administrative law judges within the SEC (to choose three recently litigated examples).
But this is, in a sense, all academic. The second question is the important one: whatever protections the Federal Reserve Act affords sitting Governors, what does that mean for a sitting Chair? It’s worth remembering that, in the complex governance of the Federal Reserve System, the Fed’s senior leaders occupy two positions, not one. They are first nominated by the president and confirmed by the Senate for their fourteen-year terms* as Governors; they are also nominated by the president and confirmed by the Senate for their four-year terms as the Fed Chair or Vice Chairs. The statute speaks to “for cause” removal protection for the Governors, but says nothing about the Chair. If statutory silence is construed as maximizing the president’s freedom of movement, then a letter that simply stated “Effective as of this date you are hereby removed from the office of Chairman of the Board of Governors of the Federal Reserve System” may do the trick.
Or it may not. In Free Enterprise Fund, the Court made the unusual decision to assume a legal conclusion that SEC Commissioners were also protected “for cause,” even though the statute says nothing about that. “The parties agree that the Commissioners cannot themselves be removed by the President except under the Humphrey’s Executor standard of ‘inefficiency, neglect of duty, or malfeasance in office,’ and we decide the case with that understanding.” 561 US 477, 486 (2010). That’s a curious position to take, permitting the parties to stipulate the very legal conclusion that is necessary for the Court to resolve.
In other words, we have no idea what the Court would do in a legal battle royale should President Trump attempt a removal of Jay Powell for raising interest rates more quickly than Trump would prefer. My own sense would be that the Chair is not protected from removal, the Governors are, and that policy differences are not sufficient to justify a “for cause” removal. But removal litigation is a wild ride that divides the appellate courts that review it. And with the Fed, this is a brave, new world. Even the presidents most indifferent to Fed independence–Harry Truman, Richard Nixon–never attempted something so openly confrontational as this.
I am, however, quite confident in this prediction. If President Trump attempts a formal removal, it will be devastating to the Fed, whatever the legal result. If 85% of Republicans follow the president on any major controversy, then the Fed’s credibility will be severely damaged. Its ability to make monetary policy consistent with the goals that Congress has identified for it will be limited. The institution itself would be remade by this fight. Fed independence is always and everywhere a political phenomenon. The legal questions are important, but ultimately it will be up to the president, his advisers, Congress, and the Fed to navigate these relationships. For those of us who favor a Fed insulated from the day-to-day of partisan politics, let’s hope President Trump rethinks any of these damaging forays into monetary policy from the Oval Office.