Can Trump Say "You're Fired" to the Fed Chair? (with Sarah Binder)
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To help us understand this looming standoff, I'm joined by political scientist Sarah Binder, co-author of The Myth of Independence, How Congress Governs the Federal Reserve. Sarah, welcome to the show. Great. Thank you for having me. So you've got a lot of splaining to do for us. Don't we all? Let's start at the top before we get to the Jerome Powell issue, which could end up being somewhat dramatic at the outset of Donald Trump's term or second term.

Remind us what the Fed does and what Chairman Powell's job is. Well, boiled down, the Fed has two jobs given by Congress. One, keep inflation low, want prices low and stable. But it's got a second job, too, which is give us a healthy, robust jobs market. And sometimes those come in conflict. So the Fed's got the job of doing what Congress tells it to do.

And Fed Chair Powell here really runs the board. We can get into the craziness, bit of a weird institution. Right, because, yeah, he doesn't have just one job, right? Well, he wears, I suppose, a couple hats. He is the president-appointed, Senate-confirmed chair of the Federal Reserve Board, which is the seven members, the seven governors in Washington.

He also, selected by his colleagues on the board and on this system of 12 Federal Reserve banks, they elect him each year by practice to be the chair of the Federal Open Market Committee, the FOMC, right? It's the body that actually makes decisions over most parts, but not all, of monetary policy, in particular, setting interest rates. So let me ask this question, because my experience is mostly...

on the legal judicial side. Does someone have to be nominated by the president and confirmed by the Senate just to be on the board? Not the chair, but just to be on the board? Yes. So of those seven governor positions, they all need confirmation. Okay. So is this like the Supreme Court insofar as you get nominated to be in the Supreme Court, you're an associate justice of the Supreme Court, but you can't just take someone who's already in the Supreme Court and make them the chief justice. That person has to be re-nominated and have a separate vote

In the Senate to be the chief justice is the Federal Reserve like that or can someone who's just a member be elevated to chair? Well, at the origins of the Fed going back 100 years and all the way to the 1970s, the president could just name someone who's been confirmed to the board, but just name them to a four year term as chair.

Starting in the late 70s, Congress changed the rules. They didn't like that. They wanted to have some greater sort of oversight and sort of accountability of this chair. And so now the chair not only gets confirmed one confirmation vote to a seat on the governor, a governor on the board.

But there's a separate confirmation vote to be the chair for a four-year term or a vice chair for a four-year term. Okay. So remind us one more thing. Who appointed Jerome Powell to be chair of the Federal Reserve?

Well, like many Fed chairs, he's been appointed by more than one president. So he had been appointed to the board by President Obama. Right. But then it was Trump who appointed him chair, again, really elevating him to the position of chair in 2018. Right.

And then Biden, facing a decision in 22, hmm, should I keep Jay Powell or shall I find my own chair? And he went with sort of the old model for the Fed, which is to have the chair to stay for another term. Okay, so I'm going to use a technical term. Why is Trump so pissed off at Powell? And in your answer, discuss, obviously, there were inflationary issues and problems in the recent past. But at the moment, I think the consensus would be

The Fed is doing pretty well at one of its two principal jobs, as you articulated them, keeping interest rates low. I think he just wants rates as low as possible. And we know that in part from the first term, rates were already low. He was pushing for negative rates, right? Even lower where the Fed was just not going to go. Part of what Trump wants is to have control over all parts of government.

Whether properly an executive branch or not, whether fully governmental or quasi-governmental, that's how he thinks about the Justice Department. He doesn't believe in the independence, either by norm or otherwise, of traditionally independent institutions. One is the Justice Department. Another one is the Fed. How much of this is just that Trump wants control in your mind?

Well, I think that's certainly a lot of it, right? We know he wants loyal people. And by that, we mean he wants people who will do what he tells them to do. And that's complicated when you have these structures of independence sort of that try to insulate the central bank or any other agency or department from what the president wants to do. Can you describe the tradition of

and or structural independence of the Fed. How independent is it? Is it supposed to be? Is that a good thing? Is it a bad thing?

Sure. So we can talk about the sort of independence today, like one of the features of it. And political scientists think of it in two ways. They think about like how insulated are the policymakers from politicians, right? How independent are the decision makers? And that relates to the ability to be fired or not, right? For sure. And so those board members have 14-year terms, which is really quite the longest that you'll find. Right.

And staggered. And they're staggered, right? Exactly. And so— Another good model for the Supreme Court. Yeah. So there's no—it's not like the president comes in and has an empty board to fill up.

So but also the decision making is somewhat insulated, right? Because I don't rely the Fed doesn't get appropriations from Congress. You know, it can get its own money from it's from selling bonds. So like, what does that mean? It's got a good degree of what we think of as structural independence, right? And if we lined up like, you know, three, 400 independent agencies and bureaus that we find in the federal government, it would probably be at the extremes of independence, right?

But that doesn't mean that it's like hermetically sealed from politicians, right? It's just sitting in the middle of the political system, right? And it's got probably the most important job there is in terms of controlling or managing or steering the economy, let alone the global influence on the global economy. So, of course, politicians care about what it's doing and many don't want to let it do what it wants to do.

Just to be clear, let's use a couple of examples. A sitting president of the United States, if he were to call up the Fed, the FOMC, the chair, and say, I don't want you to raise rates next time, or I want you to raise rates by a quarter point, not a half a point, or whatever instruction he would give, is the proper defensible and enforceable decision by the Fed chair to hang up the phone and say, F off?

Well, I mean, I think some of that depends on the style of the Fed chair. And we have, you know, historically, there have been quite tight relationships and contentious relationships between presidents and their Fed chairs.

But I think of it this way. Like the most important thing for the Fed – and Powell says this and Greenspan said this and so forth – is their sort of integrity, right? That they have to be seen as legitimate, right? And if we think they're legitimate, what does that mean? The public has to have confidence that the Fed knows what it's doing.

And so giving a, you know, letting the, listening to the president push and push for interest, low interest rates, fine. But the Fed has to demonstrate that it's not going to do something just because politicians told them to do it. But which people? So I'm trying to reexamine all of this in my head and

and be open-minded to the philosophical, legal, and practical arguments here. And I agree with you, and that's the tradition from which I come. But there are people in the public who voted for Donald Trump who think the Fed kind of sucks.

I believe Trump and I believe Senator Mike Lee and other people who have, you know, indicated criticism for the Fed. And they would say, well, I don't know. These folks weren't elected. I guess they were appointed. Maybe they don't know better. Maybe the elected accountable politicians like senators and the president know better. And for those people, the thing you said about public perception goes the other way. How would you respond to that?

Well, there's this long tradition, at least 100 years old, of having structurally these independent agencies, right? And protect whether it was the Interstate Commerce Commission, whether it's the FDA, right? Varying degrees of insulation from presidents. Not everybody has to agree with that's the way the government should run, right? You have a court that actually doesn't want to see infringements and restrictions on executive power, right?

So there's no single answer here. I think economists would tell you that you get better long-term economic outcomes if you have greater insulation.

So in some ways, the proof is in the pudding, of course. But I think the important point here is we've seen presidents go after their Fed chairs in the past. And they've ended up with a lot of inflation and not always long-term success. So you have to take your pick of how you're going to think about the importance of this installation of policymakers. Stay tuned. There's more coming up after this.

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Polestar has put in the time designing and refining Polestar 3, and that means the time you spend in it will be the best time of your day. Book a test drive at Polestar.com. Let's get to the legal drama. This is interesting to me. I have some experience with flirting with the issue of either resigning or being fired by the sitting president. In my case, there's no legal, ethical, or other dispute that a sitting president can fire a sitting United States attorney.

My drama lasted 24 to 36 hours because I wasn't going to take the word of some functionary in Washington who was acting, who was in an acting capacity to say that my services were no longer required. I had been asked to stay on personally eye to eye from, by Donald Trump. And I wanted to be told not even by Donald Trump, but someone to represent to me that, that the president himself wants you gone. And then as soon as that happened, I was gone. What's going to happen when Jerome Powell, as he has indicated that,

refuses to step down when Trump says you're fired. How's that going to play out? Well, Powell has told us he's not stepping down and it will open up a fireworks about his authority and his ability and the protections that are in the Federal Reserve Act for for the chair.

And the competing views here are, well, first of all, here's one legal way this could turn out, right? You look at the law. The law says as governor, you have four cause protection. And assuming the court

respects how for-cause has been interpreted in the past. You can't take Powell off the Fed, if that's true, before his term as governor is over. And that's not until 2028. And you're saying that's clear? That's very clear. Okay. If you look at the sentence that was added in 1977 about requiring Senate confirmation of the chair for a four-year term, there's no mention of for-cause protection. Right.

And, you know, I'm not a big legal scholar reader here of the law, but it's not confusing on the face of it. There's no weird commas that, you know, give rise to alternative interpretations. It's not there. And so some legal scholars would tell you the default in this situation is, I'm sorry, no for-cause protection if the law doesn't say it.

And that would suggest that Powell, in fact, maybe goes to court, but then it's in the hands of the courts and it's in the hands of the Supreme Court. But as a functional matter, given your interpretation that you just described, Powell could be demoted to sort of standard governor. Absolutely. But he would be taken off the chair position. But what happens in the interim? So we talk about legal cases all the time. Often what's important is what is the status quo here?

During the pendency of the fight. So does he immediately have to step down and then get reinstated after a long court battle? Or does he remain in place? Or I guess the parties would each have to make an argument about what the status quo should be.

Well, if Powell were to stick to his guns here and say, I'm not going anywhere, I'm going to sue to keep my chairmanship, a couple of things. So if that's the status quo, we don't know what a court would do in the short term.

But his chair term expires in May 2026. And I don't know how fast it makes it through the courts, if at all. And so I think we don't know what the status quo would be other than keeping him in his chair. This may be outside of your wheelhouse, but do you think that Chairman Powell, if he refuses to resign, can be deported? You know, I have to make jokes about these things. Otherwise, it's hard. I hope it's a joke.

Well, I don't know. I think it's a joke, but while we're on it, I warned you that I was going to ask you this before we hit the record button. You know, in my world, everyone is a flutter because Matt Gaetz, controversial congressman, actually no longer congressman, he just stepped down, was named to be Trump's choice to be the Attorney General of the United States. We're recording this on a Thursday. Maybe it'll be different by the time people listen to this. But my question for you is,

And everyone has their head on fire for good reasons on the Republican side as well as the Democratic side about Matt Gaetz. Who would be the Matt Gaetz equivalent for the Fed?

Deportable or not? Well, the one that comes to mind is just I'm thinking Bitcoin. I'm thinking kind of techno boys and I'm thinking off the wall. I'm thinking Elon Musk. I think you put him in there and he knocks heads and he does whatever it seems, whatever Trump tells him to do. So.

Will we get to that? I don't know. All right. Now I'm sorry I asked the question, which happens a lot with me. All right. So putting aside how it immediately plays out and who is in what status quo position, at the end of the day, when Trump says, I'm going to fire Jerome Powell and it's set up for the courts and it goes up to the Supreme Court, do you have a view on how that might turn out?

Well, we get very – a couple cues here from the Supreme Court that kind of go in different directions though. So there's a court – a case in 2020 where they said the head of the director of the Consumer Financial Protection Bureau, Congress, erred. You couldn't give that single director a four-cause protection, violated separation of powers.

Would they do the same for a board that has multi-members? They've sort of hinted that they wouldn't historically. But there's also a little line in that, the Sela Law opinion, the little line that said, even assuming financial institutions like the Second Bank and the Federal Reserve can claim a special historical status, CFPB is an entirely different league.

Are they hinting that they might treat the Federal Reserve differently? I mean, you never want to be in the same sentence with the second bank, which doesn't exist anymore. But you could imagine possibly they read into the law, the importance of the Fed and think of it differently.

But you could imagine an alternative where four to five justices, Republican appointed justices, decide that this is just a constraint, an unconstitutional constraint on the president's ability to execute and take care of execution of the law, to have that type of protection for him, especially if it's not stated in the law. Yeah. That's where my money is. Yeah. Yeah.

Yeah. It's going to take a while. Let me ask a couple other questions because there have been other options articulated by some. One is the option Trump might have of a point of announcing an intent to nominate or nominating a new chair, even as Jerome Powell doesn't step down, which some people refer to as the shadow chair option. How the heck how the heck would that work?

Well, I don't think it would work. It would come off in one way. Either Jerome Powell says, I'm not standing around for this. I'm out of here. I don't think he'd really do that. But neither do we know what it would be like with someone hanging around pretending to be a shadow chair.

The second problem is that the markets go haywire, that they want to know who's the chair. You can imagine bond markets, rates going up, prices going up, and raising the cost of credit and raising interest rates. You could imagine a problem there, an economic problem. And so in that case, it's kind of mayhem there.

And again, back to what the Fed wants most, it needs to be seen as legitimate, right? It needs public confidence and it needs public support, right?

We also don't know what's Congress doing? What are those Senate Republicans doing, right, who hold the hands of confirming people? What do they think? Do they think this is a good way to manage the Fed? They might. Are they more loyal to Trump? They might be. So I see chaos if you have someone who's thinking we're thinking of him as a shadow Fed chair. Chaos. That sounds familiar. It does. So you've mentioned economists and you talked about the markets.

So my question is, putting the economists aside, what do the quote-unquote captains of industry, the CEOs of major financial institutions in the country, want in terms of Fed independence and this clash? What side are they on?

Well, we don't fully know because, you know, some are quite loyal, friendly with Trump and all bets are off with that. Doesn't business come first? We'll see. But what businesses really want is that they want to plan. They want certainty. They want to know what the Fed's going to do next.

And they want the Fed to do what the Fed says it's going to do. And that's the problem for having a president trying to run the Fed or tell it what to do. I mean, look.

Nobody has a prognosticating looking glass that's without error. But it must be true that the predictability of what the Fed is going to do will be higher if it's independent than if it's subject to a politician, right? Yeah, and that is the theory, right? That they're able to say what they're going to do and to carry it out. Yeah, so who's in Trump's ear? Why aren't these people telling, or have they given up on that because he's

He's his own manager. Well, they may well be whispering in his ear about this. They're too busy whispering about tariffs. Right. One battle at a time. So I think it remains to be seen. Granted, Trump 1.0 is and was different than what Trump 2.0 will be. But he was talked out of it the last time.

in late 2018 when he was really mad at Jay Powell. Markets probably gave a little concern. Folks were telling him, both I bet Steve Mnuchin may have been whispering to him. And so we know he backed down from that. You know, I don't want to predict that Trump is backing down from anything, but I

bad reaction in the markets. As my co-author on my Fed book, Mark Spindell, says, you know, the bond market's got a seat, they've got a seat at the table too in the FOMC. So I think we can't assume that Trump can just bulldoze the Fed, but it would be pretty ugly, I think, for the economy if he does. Well, you might have answered my final question then with that response. But just so people who are not economists like I'm not understand the gravity or the magnitude of this, because

You know, people are often talking about this problem or that problem or this being unprecedented and that being without precedent. If it came down to this clash and it happens and the president decides to fire Jerome Powell and there's a standoff and the markets go haywire, unfair, but I like the scale, one to 10, how significant an economic effect is this event?

Well, again, we don't really know precisely what markets would do, but they would probably be unhappy. But one never knows. Right.

So, we don't fully know. We also don't know precisely what else is going on in the economy were this to come to a head over Jerome Powell, right? Are we in tariff wars with Europe and with allies? And are we in tariff wars with China? Right?

What else is going on? And has Congress just, you know, done a $4 trillion unpaid tax cut? And is there about to do a, you know, a $3 trillion spending, discretionary spending bills? Like, what else is going on? And so I think Trump 2.0, the economy's

going to look a lot different than the first time around. And that's going to change, I think, what Trump can get away with in terms of how threatening he is and how much defense, like who comes to the Fed's defense. Well, if and when this comes to pass, you'll have to come back and do the play-by-play color commentary. Really appreciate it, Sarah Binder. Thank you. Anytime. Thanks so much for having me.

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I'm your host, Preet Bharara. As always, stay tuned.

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