Tag: President Donald Trum

Supreme Court Rules that Lisa Cook Can Remain on the Fed Board

Image created by ChatGPT of the U.S. Supreme Court building

The Federal Reserve Act states that a member of the Federal Reserve’s Board of Governors “shall 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.” In August 2025, President Trump attempted to remove Governor Lisa Cook from the Board on the grounds that she had made misrepresentations in a mortgage application in an attempt to secure a lower interest rate. Cook filed suit arguing that, rather than removing her for cause, the president wished to remove her because he disagreed with some of her policy positions. She also argued that she had not been given an opportunity to rebut the accusations against her.

Her lawsuit made its way through the federal courts, eventually reaching the Supreme Court. Today, in a 5 to 4 ruling, the justices sent the case back to a lower court to determine the merit of the accusation against Cook. The majority opinion stated that, “Under the Court’s precedents, Cook was entitled to notice and some opportunity to respond before her termination.”

Image created by ChatGPT of of President Franklin Roosevelt

As we noted in a blog post last year, President Trump’s attempt to fire Governor Cook involved a larger issue. The ability of Congress to limit the president’s power to appoint and remove heads of commissions, agencies, and other bodies in the executive branch of government—such as the Federal Reserve—is not clearly specified in the Constitution. For years, the federal courts had followed the precedent established in the 1935 case of Humphrey’s Executor. In that case, the Court ruled that President Franklin Roosevelt couldn’t remove a member of the Federal Trade Commission (FTC) because in creating the FTC, Congress specified that members could only be removed for cause.

In recent years, the Court has been narrowing the scope of the Humphrey’s Executor ruling. Today, in a case involving President Trump’s attempt to fire a commissioner serving on the Federal Trade Commission (FTC), the Court overturned its ruling in Humphrey’s Executor. Henceforward, president’s will be allowed to fire members of any regulatory commission or other body in the Executive Branch of the federal government without having to establish a cause for the firing.

The Court did not, however, rule today as to whether presidents are allowed to fire members of the Fed’s Board of Governors or whether the Federal Reserve has a special role in the government that requires presidents to remove Governors only for cause. The majority opinion contains a summary of the history of central banks in the United States. That summary seems to indicate that, in fact, a majority of the Court does see the Fed as having a special role in the government. In other words, it seems likely that the government would have to prove that Governor Cook had engaged in significant wrongdoing for her to be removed from office by the president.

Image created by ChatGPT of the Federal Reserve’s headquarters

The majority in this case consisted of Chief Justice John Roberts, Justice Brett Kavanaugh—both of whom were appointed to the Court by Republican presidents—and the three justices who were appointed by Democratic presidents. Three of the other Republican-appointed justices dissented on the grounds that the Court should have waited until the charges against Cook had been resolved in a lower court before ruling. It’s possible that if the case returns to the Supreme Court after questions of fact have been decided in a lower court, one or more of these justices may side with the majority in today’s ruling in holding that members of the Board of Governors cannot be removed from office except for cause. Justice Clarence Thomas—who was also appointed by a Republican president—was the only justice to argue that presidents should be allowed to freely remove members of the Board of Governors. Justice Thomas specifically rejected the argument that the Fed plays a special role in the federal government that differs from the roles played by other agencies such as the FTC: “The Court makes many policy arguments for an ‘independent’ banking agency that exercises executive power free from accountability … but those are ultimately arguments against the Constitution.”

Yesterday at the Fed Something Happened That Was Unusual … or Was It?

Photo of Michael Barr from federalreserve.gov

President-elect Donald Trump has stated that he believes that presidents should have more say in monetary policy. There had been some speculation that once in office Trump would try to replace Federal Reserve Chair Jerome Powell, although Trump later indicated that he would not attempt to replace Powell until Powell’s term as chair ends in May 2026. Can the president remove the Fed Chair or another member of the Board of Governors? The relevant section of the Federal Reserve Act States that: “each member [of the Board of Governors] shall 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.”

“Removed for cause” has generally been interpreted by lawyers inside and outside of the Fed as not authorizing the president to remove a member of the Board of Governors because of a disagreement over monetary policy. The following flat statement appears on a page of the web site of the Federal Reserve Bank of St. Louis: “Federal Reserve officials cannot be fired simply because the president or a member of Congress disagrees with Federal Reserve decisions about interest rates.”

At his press conference following the November 7 meeting of the Federal Open Market Committee (FOMC), Powell was asked by a reporter: “do you believe the President has the power to fire or demote you, and has the Fed determined the legality of a President demoting at will any of the other Governors with leadership positions?” Powell replied: “Not permitted under the law.” Despite Powell’s definitive statement, because no president has attempted to remove a member of the Board of Governors, the federal courts have never been asked to decide what the “removed for cause” language in the Federal Reserve Act means.

The president is free to remove the members of most agencies of the federal government, so why shouldn’t he or she be able to remove the Fed Chair? When Congress passed the Federal Reserve Act in 1913, it intended the central bank to be able set policy independently of the president and Congress. The president and members of Congress may take a short-term view of policy, focusing on conditions at the time that they run for reelection. Expansionary monetary policies can temporarily boost employment and output in the short run, but cause inflation to increase in the long run.

As we discuss in Macroeconomics, Chapter 17, Section 17.4 (Economics, Chapter 27, Section 27.4), in a classic study, Alberto Alesina and Lawrence Summers compared the degree of central bank independence and the inflation rate for 16 high-income countries during the years from 1955 to 1988. As the following figure shows, countries with highly independent central banks, such as the United States, Switzerland, and Germany, had lower inflation rates than countries whose central banks had little independence, such as New Zealand, Italy, and Spain.

Yesterday, something unusual happened that might seem to undermine Fed independence. Michael Barr, a member of the Board of Governors and the Board’s Vice Chair for Supervision, said that on February 28 he will step down from his position as Vice Chair, but will remain on the Board. His term as Vice Chair was scheduled to end in July 2026. His term on the Board is scheduled to end in January 2032.

Barr has been an advocate for stricter regulation of banks, including higher capital requirements for large banks. These positions have come in for criticism from banks, from some policymakers, and from advisers to Trump. Barr stated that he was stepping down because: “The risk of a dispute over the position could be a distraction from our mission. In the current environment, I’ve determined that I would be more effective in serving the American people from my role as governor.” Trump will nominate someone to assume the position of vice chair, but because there are no openings on the Board of Governors he will have to choose from among the current members.

Does this episode indicate that Fed independence is eroding? Not necessarily because the Fed’s regulatory role is distinct from its monetary policy role. As financial journalist Neil Irwin points out, “top [Fed] bank supervision officials view their role as more explicitly carrying out the regulatory agenda of the president who appointed them—and that a new president is entitled, in reasonable time, to their own choices.” In the past, other members of the Board who have held positions similar to the one Barr holds have resigned following the election of a new president.

So, it’s unclear at this point whether Barr’s resignation as vice chair indicates that the incoming Trump Administration will be taking steps to influence the Fed’s monetary policy actions or how the Fed’s leadership will react if it does.