'Where's Kevin?'
Trump, Powell and a Warsh Fed
Federal Reserve Chair Jay Powell came under attack from President Trump this week. Trump said: ‘he’s always too late, a little slow. And I’m not happy with him...If I want him out, he’ll be out real fast, believe me.’
Trump subsequently walked back his comments, but as usual, the damage was already done. US assets sold off across the board in a pattern qualitatively, if not quantitatively, reminiscent of emerging market crises. US equities have had their worst April since 1932 and are underperforming relative to emerging market equities. Investors are seeking safety in EUR, CHF and JPY denominated assets. For all the talk of a Mar-a-Lago accord to address US dollar strength, the Trump administration is doing a perfectly good job of weakening it all by itself. Ironically, Trump's attacks on Powell will make it even harder for the Fed to ease policy without being seen to have caved to political pressure.
As many commentators were quick to observe, Trump appears to be setting up Powell as the scapegoat for the downturn caused by his administration's tariffs and what Treasury Secretary Bessent concedes is an effective trade embargo on China. Powell was a Trump 1.0 appointee, replacing Janet Yellen. The first Trump administration rightly feared that Yellen would tighten monetary policy in response to its tax cuts. For all her reputation as a dove, the Yellen Fed kept monetary policy unintentionally tight.
By contrast, Powell learned from the mistakes of the Bernanke and Yellen Feds. When the pandemic hit in 2020, he quickly unleashed a monetary easing that dwarfed that seen during the 2008 crisis. The worst that could be said about that response was that it succeeded too well. The US quickly returned to full employment, with inflation overshooting its target. The US economy outperformed its peers in the latter stages of the Biden administration.
Powell's term on the Federal Reserve Board runs until 31 January 2028. His term as Board chair runs until 23 May 2026. This raises the question as to whether Trump can fire Powell before then.
"You're fired!" Can the President remove Powell?
The current legal status of the independence of the Chair of the Federal Reserve hinges on the 1935 Supreme Court precedent known as Humphrey’s Executor vs. United States. This ruling established that heads of independent agencies, in particular the Federal Trade Commission, could only be removed by the President for ‘cause,’ which is generally interpreted as illegal activities or gross incompetence, rather than policy disagreements. This precedent has served as a major legal guardrail protecting the Federal Reserve and its governors, including the Chair, from being fired at the President’s pleasure.
Trump has publicly stated he has the right to fire Powell. This position is intertwined with ongoing court cases related to his earlier firings of board members at other independent agencies, specifically Gwynne Wilcox of the National Labor Relations Board (NLRB) and Cathy Harris of the Merit Systems Protection Board. These officials were also protected by the Humphrey’s Executor precedent.
The cases involving the NLRB and the Merit Systems Protection Board directly test the Humphrey’s Executor decision. The Trump administration has appealed lower court rulings that reinstated these officials, arguing against the ‘for cause’ removal protection.
A panel of the DC Circuit Court of Appeals embraced Trump’s legal theory, potentially weakening the Humphrey’s Executor precedent. This ruling is being challenged, with the possibility of the full DC Circuit reconsidering it, followed by a likely review by the Supreme Court.
The Supreme Court has already shown its interest by issuing an order preventing Wilcox and Harris from returning to work while it considers the appeal. The Supreme Court’s decision in these cases will have significant implications for the future of independent agencies, including the Fed.
Despite the challenges to Humphrey’s Executor, some legal scholars argue that the Supreme Court might create a carve-out or Fed exception to protect the Federal Reserve’s independence. This argument is based on the Fed’s unique historical background, its crucial role in monetary policy, and the potential for market instability if its independence is compromised. Even Justice Alito, often considered part of the conservative legal movement skeptical of broad independent agency power, has previously noted the Fed as a ‘unique institution with a unique historical background.’
The Trump administration has attempted to argue that the President should have executive power over the regulation and supervision of financial institutions by the Fed, while potentially leaving its monetary policy functions independent. This distinction is deeply problematic because monetary policy implementation is heavily intertwined with bank regulation.
The 2020 Supreme Court case Seila Law v. Consumer Financial Protection Bureau created a legal foundation emphasising presidential control over government agencies. Some argue this case weakens the basis for independent agencies with single heads removable only for cause. However, the Fed has a multi-member board structure, which might distinguish it legally.
Even if the ‘for cause’ protection remains for the Fed Chair, the definition and justification for ‘cause’ could become a battleground if a President seeks to remove a Chair over policy disagreements. The lack of legal precedent on ‘for cause’ removals could lead to significant uncertainty, not to mention potential market disruption.
So while Humphrey’s Executor currently provides significant legal protection to the Federal Reserve Chair from being dismissed at will by the President, this protection is under scrutiny due to ongoing court cases challenging that precedent. The Supreme Court’s decisions in the NLRB and Merit Systems Protection Board cases will be critical. A key point to watch is whether the Court will overturn Humphrey's Executor broadly or effectively create an exception to preserve the Federal Reserve’s independence, recognising its unique role and historical context. Even if Humphrey's Executor survives in some form for the Fed, the interpretation and application of the ‘for cause’ removal standard could become a future point of contention.
‘Where's Kevin?’
Regardless of whether Powell serves a full term, it is worth speculating on his possible replacement. Kevin Warsh was runner-up to Powell when Trump sought to fill the role in 2017. Warsh was previously a George W. Bush appointee to the Board and served from 2006 to 2011, but Warsh’s nomination did not proceed under Trump. He subsequently put in an appearance at the signing of Trump’s ‘phase 1’ trade deal with China in January 2020, at which Trump expressed buyer’s remorse at not having chosen Warsh over Powell (see the clip in the beginning of the Bloomberg interview below). So Trump’s animus towards Powell goes back to at least 2020, only two years after he first appointed him Fed Chair.
The possibility of a Warsh appointment was heavily scrutinised by Employ America, along with other prospective candidates, as part of a very effective campaign to weed out nominees with historically mistaken views on monetary policy. In this Bloomberg interview from January 2020, Sam Bell discusses the counterfactual of a Warsh Fed:
As Bell notes, there were two possibilities. Warsh might have lived up to his hawkish critiques of past Fed policy and presided over an even more hawkish monetary policy stance. Or, he might have simply done Trump’s bidding as a Trump appointee. If we got hawkish Warsh, Trump would no doubt have been even unhappier with Warsh than he was with Powell, which only serves to illustrate the more fundamental problem that no appointee to the role of Fed chair is safe from political pressure with Trump in office.
A problem for Trump is that most Republican-aligned prospective Fed chairs are in fact very hawkish, bordering on outright liquidationist. John Taylor, for example, has consistently argued that his eponymous policy rule is optimal. But implemented as such, it would have almost certainly crushed the US economy. Judy Shelton, another prospective Trump 1.0 nominee, was a long-standing hawkish Fed critic who then became more flexible once Trump showed an interest in her. Shelton’s Bretton Woods revivalism was famously derided by Milton Friedman in a WSJ op-ed in the mid-1990s.
As the experience with the Yellen Fed demonstrates, many Democrat-aligned economists have been accidental hawks, running a monetary policy that was unintentionally tight because of a failure to accurately gauge the effective stance of monetary policy. This is the essence of the market monetarist critique of post-crisis monetary policy. A Larry Summers Fed, for example, would have likely made the same mistakes as Yellen. Until Powell came along, the post-2008 history of the Fed was marked by bipartisan hawkish policy errors. As we have noted here previously, this consensus policy mistake is evident in the serially correlated forecast errors for interest rates over this period.
Trump’s decision to appoint Powell to the Fed was quite possibly the best he ever made. When the pandemic hit, Powell stepped up in a way that would have been very unlikely coming from Bernanke, Yellen, and most especially Warsh, even if for somewhat different reasons in each case. You can argue over the results, and even whether they helped pave the way for Trump 2.0. But that only makes Trump’s animus towards Powell even more misplaced from his perspective.
Trump is unlikely to ever get the monetary policy he wants from a responsible, independent central banker. Which is why he will continue to work to undermine the independence of the Fed.
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