Trump’s Strategic Win: Understanding the Fed’s Independence and Barr’s Departure

President-elect Donald Trump didn’t have to ask Federal Reserve Vice Chair Michael Barr to step down from his role as the central bank’s top regulator. As rumors mounted that Trump might try to demote him, Barr decided to spare everyone the trouble.

“I strongly value the independence of the Fed,” Barr told POLITICO on Monday shortly after he announced his plans to resign as vice chair of supervision. He said he chose to quit as vice chair — while maintaining his seat as a Fed governor — because he “was worried that the risk of a dispute over the position would end up being a political distraction for the Federal Reserve and for me, and that that would end up detracting from our ability to serve our mission.”

Barr’s decision may have kept the Fed out of a politically toxic battle with a president who wants to exert more influence over interest rate policy. But his choice to depart leaves unresolved the thorny legal arguments about whether Trump can fire or demote top Fed officials — including, potentially, the chair. It also ensures that questions about Trump’s ability to chip away at the Fed’s prized independence will linger as he assembles an economic team that has questioned the central bank’s structure and operations.

Barr still had more than a year left in his four-year term — he told lawmakers in November that he intended to see it through even if Trump or Elon Musk attempted to fire him. And his move sets a clear precedent that “the incoming president gets to de facto ignore the term limit of the vice chair of supervision,” said Dennis Kelleher, the CEO of the financial watchdog group Better Markets. “It’s not clear to me the principled basis on which you could distinguish that from the chair.”

“To not understand the importance of fighting here is to not understand anything,” Kelleher said.

But H. Rodgin Cohen, a prominent Sullivan & Cromwell litigator who played a key role in negotiating several mergers during the global financial crisis, said a fight over Barr’s role would have risked weakening the Fed’s independence and spilling out into questions about the removability of the Fed chair. He called Barr an institutionalist, “in what I consider the best sense of the word.”

“The Fed is obviously a very critical part of the economy, and if the president was really going to try to litigate to remove him, I think from the country’s perspective it was the best decision,” Cohen said.

Notably, Trump has said he has no plans to fire Fed Chair Jerome Powell and has never commented publicly on Barr. But he severely criticized Powell’s interest rate decisions during his first term, and Barr has incensed the country’s biggest banks with plans to significantly hike their capital requirements — the money they set aside to cover potential losses — and drew fire for a series of bank failures in early 2023.

Trump’s transition team did not respond to a request for comment.

To be clear, Fed officials and their allies are adamant that the law would have been on Barr’s side had he opted to stay and fight for his job. Powell in November said any attempt on the part of the new administration to fire or demote the central bank’s appointed leaders is “not permitted under the law.” Barr told POLITICO that both the Fed’s general counsel and his outside law firm, Arnold & Porter, concluded that the president didn’t have the power to remove him from his job.

Scott Alvarez, the Fed’s former general counsel, said Barr would have had “the best argument” if he’d had to rely on the courts to preserve his vice chairship, noting that Republican and Democratic legal experts — including former Trump officials — have also said the central bank’s top policymakers are legally protected.

But “until a court makes a final decision, there’s going to be a lot of arguments among lawyers,” he said. “There’s a lot of politics in this one, and that’s something the court would strip away.”

Throughout the 2024 campaign, Trump advisers and allies floated several ideas as to how he might blunt the Fed’s independence in his second term. Stephen Miran, Trump’s pick to lead the Council of Economic Advisers, and Dan Katz, who’s slated to be chief of staff at Treasury, published a paper calling for changes that would allow the president to dismiss Fed governors at will. Trump’s Treasury nominee Scott Bessent proposed appointing a “shadow Fed chair” to provide forward guidance on rates while Powell serves out his term as chair. (That idea has already been abandoned.)

Still, there is an emerging school of thought among some banking and administrative law experts that the Fed’s insulation from political influence is thinner than previously assumed. Two recent Supreme Court cases — Collins v. Yellen and Seila v. CFPB — may have created a legal framework by which Trump could dismiss the Fed’s leadership. Banking industry sources have also pointed to a memo produced by the Justice Department’s Office of Legal Counsel in 2021 that identified a legal rationale for the president to fire a Social Security Administration commissioner at will.

University of Virginia law professor Aditya Bamzai and Aaron Nielson, a Brigham Young University law professor, published a paper in the Cornell Law Review contending that recent Supreme Court decisions underscore that the president “likely already enjoys a great deal of statutory authority to remove the Federal Reserve’s leaders.”

Nielson served as a court-appointed amicus in the Collins that paved the way for President Joe Biden’s firing of former Federal Housing Finance Authority head Mark Calabria.

The FHFA case, along with the Seila case that rendered unconstitutional protections designed to insulate the Consumer Financial Protection Bureau director from the president, afford the president much more sway over independent regulators — including the Fed.

“Any statutory protections for the Fed’s leaders (to the extent such protections exist at all) may be too weak to provide meaningful independence,” they concluded. “Under today’s doctrinal framework, the chair and vice chairs likely serve at the President’s pleasure.”

It’s far from clear how receptive this Supreme Court might be to those arguments. Both Chief Justice John Roberts and Justice Brett Kavanaugh have written that the circumstances around the Fed are unique.

Another confounding factor is that the Fed creates regulations — a responsibility that usually falls within the executive branch’s purview — in addition to its monetary policy functions.

“Fed independence in making monetary policy is incredibly important and well understood and supported by research all over the world,” said David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy. “It’s not clear that Fed independence on bank regulation is in the same category.”

Barr’s decision assured that the courts won’t render an opinion on those distinctions — at least not anytime soon.

“It’s a win for Trump,” Wessel said. “He gets Michael Barr out of the bank supervision role without having to do anything.”