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It’s almost funny: Every time President Trump denounces Federal Reserve Chair Jerome Powell, proclaiming he will fire him — any day now! — the stock market plunges.
Trump’s “Liberation Day” tariffs would bring “higher inflation and slower growth,” Powell declared. The Fed, he made clear, could not cushion the blow. On Monday, Trump again threatened to dismiss Powell, “unless Mr. Too Late, a major loser, lowers interest rates, NOW.” The Dow fell more than 950 points. Whee!
All of this could produce a financial crisis and a constitutional crisis rolled into one. Trump cannot fire Powell — not legally, anyway. On many fronts, the White House is heading toward an epic collision with the courts. With this bombast and brinksmanship, it is also careening toward the Fed and the financial markets that depend on it.
Some background: The Federal Reserve is the United States’ central bank. It was established in 1913 after the ruinous financial crashes of the Gilded Age — the model for Trump’s promised “Gilded Age.”
The Fed is an agency set up to be independent of the political branches of government. It is charged with ensuring what it calls a “resilient financial system.” Populists have long criticized this arrangement. Presidents often will growl at the Fed. Most notoriously, Richard Nixon pressured it to cut interest rates before the 1972 election. Oval Office tapes capture Nixon telling the Fed chair that if bankers resist, “just kick ’em in the rump a little.” When the Fed caved to political pressure, it helped spark a decade of inflation.
But most of the time, politicians of both parties recognize that the Fed’s independence plays an important role as a means to counterbalance the tendency to spend freely or cut taxes.
William McChesney Martin, the Fed chair in the 1960s, famously explained his role: “I’m the fellow who takes away the punch bowl just when the party is getting good.”
Which is where Trump’s latest threatened power grab comes in. Multiple statutes guarantee the agency’s independence, among them the Federal Reserve Act. The chair serves for a four-year term and can only be dismissed for cause, meaning malfeasance. Still, Trump says not only that he wants to fire Powell but that he has the power to do it. He doesn’t. He may try anyway.
That’s because he claims that a long-standing Supreme Court decision barring presidents from firing the heads of independent agencies is unconstitutional — and the conservative supermajority on the Supreme Court may agree.
The 1935 case was called Humphrey’s Executor. William Humphrey was a reactionary and thoroughly unpleasant Federal Trade Commission member whom President Franklin D. Roosevelt wanted to fire. Humphrey kept going to work even after he was dismissed, then died while the legal challenge to pry him from his office was being heard. His heirs sued for his back pay.
The Supreme Court ruled that even FDR, at the peak of his power, could not fire grumpy old Mr. Humphrey. “That damn little case,” recalled FDR aide Robert Jackson, later a justice himself, “made Roosevelt madder at the Court than any other decision. . . . [He] thought they went out of their way to spite him personally.”
But over the 90 years since, that legal rule has protected the independent agencies created by Congress to police markets and protect consumers and workers. The Supreme Court’s current conservative supermajority at times has seemed eager to overturn Humphrey’s Executor and has chipped away at it in recent rulings. Now a case involving the firing of the head of the National Labor Relations Board is headed for the Court, which may use it to revisit this core issue of presidential power.
These agencies wield great power and were given the authority to make rules and decide cases because they are staffed with experts, beholden to the law rather than the whim of a president. But many businesses have wanted to curb their reach.
All this poses an exquisite structural conundrum: If independent agency leaders can be fired, that doesn’t just apply to the FTC, the Securities and Exchange Commission, the labor board, or other multimember agencies scorned by business lobbyists. It might well apply to the Fed, too.
And just like the Fed, there are agencies whose very existence depends on their independence, including the Federal Election Commission and the Election Assistance Commission, which were designed by Congress to be bipartisan and independent.
If Trump fires Powell, it would likely have a thermonuclear economic impact. Markets would plunge. Public confidence would crash. Interest rates would rise, because investors would assume that the most effective check against inflation had been smashed.
The Supreme Court’s conservatives may try to find a way to gut the other regulatory agencies while sparing the Fed. They may have to twist themselves into unnatural positions to do so. Justice Samuel Alito hinted at something like that in a recent footnote to his dissent in a case involving a different regulatory agency. The “funding of the Federal Reserve Board should be regarded as a special arrangement sanctioned by history,” he explained.
Will people care if Trump fires the Fed chair? Who has sympathy when a banker is shown the door? If Trump’s executive power grab leads to economic convulsion, you’d be surprised how much people care.
Remember that in 1789, France’s King Louis XVI, fed up with challenges to his own absolute monarchy, fired the finance minister Jacques Necker, a technocratic Swiss banker. Mobs began to protest. “Bring back Necker,” they shouted, carrying pitchforks and torches. And so began the French Revolution.
