In Fed We Trust: Trump, Executive Power and The Federal Reserve
President Trump has aggressively stretched traditional expectations about the scope of Presidential Power. He has “de facto” destroyed the EPA, The Department of Education and USAID- departments created and funded by Congress. He has claimed the right to “impound” dollars designated by the legislative branch for particular departments and agencies. He has terminated thousands of federal employees, ignoring civil service protections. He has arbitrarily fired trustees at cultural institutions (the Kennedy Center and Holocaust Museum). He has issued Executive Orders targeting law firms who have represented his political opponents. He has cancelled federal research grants at major universities because he does not approve of their DEI policies. Finally, he has openly asserted his right to terminate Commissioners at independent agencies without cause- contrary to the terms of service established at the time of their appointment. The effort to dismantle the historical independence of agencies like the FCC, FTC, SEC, NLRB, FHA by firing commissioners appointed by a President from the opposition party will have enormous impact on those agencies fulfilling their mandates. The early terminations are being challenged in court and the ultimate resolution of Presidential removal rights will be decided by the Supreme Court. If the Court sides with the administration, the next target may be the Federal Reserve Bank and its sitting Governors. It is high stakes legal battle.
President Trump often appears to act impetuously with little interest in identifying the legal and constitutional basis of his actions. Many policy pronouncements are seemingly arbitrary and fickle with no obvious anchor other than his animosity for the targets. However, all should be aware that the administration’s attempt to centralise power in the White House is based on a genuine legal and ideological point of view- one formulated by key people in the Trump orbit even if rarely articulated by the President himself. The term of art is the UNITARY EXECUTIVE THEORY and it has been floating around conservative legal, academic and think tank circles for 40 years. It has not gained much traction until recently, but there is a core set of principles that its advocates have been keen to apply at the right time- eg a time with an aggressive Republican President and a Supreme Court ideologically receptive to the idea. Simply stated, the theory interprets Article 2 of the Constitution as granting the President absolute authority to appoint, direct and supervise the entire Executive Branch- including those established by Congress as “independent” agencies. Basically, everyone in the Executive Branch is an at-will employee, serving at the discretion of the Chief Executive. A President is charged with “faithfully executing the laws” and the theory postulates that a President can only be effective in exercising that function if he has personnel control at every level of the bureaucracy. Proponents of the theory state that the independent agencies are integral parts of the Executive Branch and therefore a President has carte blanche to fire Commissioners even though their terms have not expired - cause or no cause.The enacting statute give the President the power to make appointments but the termination rights are limited to “for cause” circumstances. One argument is “cause” is established if they disagree with the President’s policies even though historically “for cause” has been defined as malfeasance, unethical behaviour or failure to show up for work. The second argument is the “for cause” requirement is flat out unconstitutional.
Where is this going? Well, we have Supreme court precedent. In 1935, the Supreme Court, in HUMPHREY’S EXECUTIVE v UNITED STATES, the Court limited a President’s removal power by upholding Congressional authority to create an independent federal agency which explicitly limited the President to “for cause” removals. Two other cases, MORRISON in 1988 and FREE ENTERPRISE FUND in 2010 again upheld the limitation on the Presidential removal powers. The Trump administration now asserts those cases are just wrong. They also take comfort in two recent Supreme Court decisions where the Court upheld Presidential firings of Executive Directors at the Consumer Protection Bureau and the Federal Housing Finance Agency. Those cases had different twist since they were solo executives and not members of multi-member Commissions or Boards. The court’s language was precise and the Court has not yet endorsed the most expansive theories of the Unitary Power Theory. The Court is clearly open to the concept that a President’s hands should not be tied by his own bureaucracy policy execution wise. I also note that the original proponent of the Unified Power Theory was a young lawyer in the Reagan White House. His name was John Roberts and he is now our Chief Justice. You should recall he also authored the major decision on Presidential Immunity 2 years ago. I think there is solid chance the court will rule for Trump on these firings of independent agency commissioners- citing Article 2. Roberts has openly opined that a President is elected by the people, is ultimately accountable to the voters and must have control over all Executive Branch Departments to ensure policy coherence.
The big enchilada here is the Federal Reserve Board. If the Supreme Court rules for Trump in the pending independent agency appeals, he may turn his attention to the Fed. Trump appointed Jerome Powell as Fed Chair in his first term. Mr Powell was re-appointed by President Biden and his term extends to mid 2026. President Trump does not like the Fed’s current policy on interest rates. In his unique fashion, he has described the Fed Chair as a “loser,” a “bonehead,” and a “bigger enemy than Xi Jinping” the Chairman of the Chinese Communist Party. Charming as usual!! The strongest proponents of the Unitary Executive Theory have publicly stated that a President does have the power to fire all the Fed Reserve Governors, including the Chairman, without citing “cause.” Humbly, I submit they are wrong and I cautiously predict the Supreme court will agree with me. Let’s hope so. A Fed under the President’s thumb is a very bad idea.
The Federal Reserve is different than the FTC, SEC, etc. The Federal Reserve System was established in 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. Its mandate is to establish and manage monetary policy, maintain interest rates, promote financial stability and maximise employment. The Fed was NOT incorporated into the Executive Branch. The Governors do not report to the President or take direction from the President. The relationship between the White House and the Fed is explicit in the enacting statute. The President’s sole responsibility is to nominate Fed Governors for approval by Congress. The Governors have 14 year terms. They can only be terminated for cause. The Chairman’s 4 year term does not coincide with a President’s term. The Governors' terms are staggered. The Act requires the Fed to issue regular reports to Congress, not the Chief Executive. Only Congress can change the structure or the mandate which it has done on several occasions. The Fed doesn’t require Congressional appropriations for it operations- it funds itself through interest income. The White House doesn’t approve any funding. The Fed’s independence from the Executive Branch was further affirmed in 1951 with the Fed- Treasury Department Accords which recognised the Fed’s central banker control over monetary policy. Treasury acknowledged the Fed Reserve had no responsibility for financing the needs of the Treasury Department. Fiscal policy is controlled by the legislative and executive branches and separate and distinct from monetary policy managed by the Fed.
Equally important are the overwhelming policy reasons to keep the Fed independent from White House interference- noting the ultimate form of interference would be the power to fire Governors without cause. Studies clearly validate the concept that independent central banks achieve better inflation outcomes when protected from political considerations. Many other countries ignore the distinction and results are awful- eg Argentina, Turkey etc. The entire point of the original statutory structure is to ensure Fed decision making is based on long term economic considerations, not short term political preferences. The reality is that democratically elected officials face inherent short term incentives that inevitably undermine long term economic policy. Heck, look at our fiscal deficits. Very little self control is evidence there. Politicians think short term- immediate gratification short term- the next election cycle. Presidents are no different from legislators- even worse because their personal stakes are higher. Congress wisely chose to delegate monetary authority to independent experts insulated from politics- all with the purpose of establishing predictability, certainty and stability. The Fed makes mistakes- far from perfect- but far superior to an alternative system with Governors operating in an environment where they are subject to Presidential whim and capriciousness. There are numerous examples of White House attempts to influence the Fed. Nixon- Burns is a classic example and Nixon’s actions have not held up well. Carter and Bush 1 both blamed tight fed policy for their reelection losses but the Fed policies at issue were correct in retrospect. The Fed is an overtly anti- democratic institution and it is powerful, but their independence should be preserved. The Unitary Executive Theory would be disastrous if applied to the workings of the Federal Reserve Bank. Hopefully, the Supreme Court will appreciate the unique circumstances surrounding the creation of the Fed. If the Court allows Presidential removal of Chairs and governors without cause, it will turn out poorly.
