MNI INTERVIEW: Fed Independence Facing Imminent Risk - Menand

Markets are underpricing an imminent threat to Fed independence as the Supreme Court is set deliver a ruling at any moment that might embolden the Trump administration to fire Fed Chair Jerome Powell, Lev Menand, an ex-senior Treasury adviser who specializes in legal matters around central banking at Columbia Law School, told MNI.

“The Supreme Court could rule at any moment, and I would expect a ruling in the coming days. I do think that it’s very unappreciated that this is happening outside of the legal community,” said Menand, also a former New York Fed staffer. 

At issue are President Donald Trump's increasingly vocal threats to oust Powell as the administration’s pleas for the central bank to lower interest rates. A pending ruling before the Supreme Court related to Trump’s firing of directors of other independent agencies including the NLRB could open the door to greater executive discretion over the fate of Powell and Fed Board governors, despite long-standing precedent and perceived legal protections. 

“If that stay is granted, it will be a permission slip to the president to fire whoever he wants. Because the worst thing that happens is after months of litigation, they get back in their job. In the meantime, they weren’t in their job. That would be one thing for the NLRB, but a very different thing for the Fed,” Menand said in an interview. 

“If the President were to prevail, get this emergency stay and then say, ‘You know what, I'm just going to fire some Fed governors because they'll be out of a job for months,' the lower court can't put them back in during their litigation.”

GOVERNORS AT RISK

Governors Lisa Cook, Michael Barr and Vice Chair Philip Jefferson, all appointed by former President Joe Biden, could be on the chopping block if Trump has his way, Menand said. 

“The officials at most risk are the recently-appointed Biden appointed officials associated with bank regulatory policy,” he said. “It allows the administration to say, look, we didn't remove Jay Powell, we just got rid of all these Biden appointees who are inconsistent with our regulatory policies.”

“The problem is that monetary policy and regulatory policy is done by the same people. So if you fire Michael Barr, Lisa Cook, Philip Jefferson, you don't need to fire Powell. He gets the message. And those people are off the board, they can’t vote anymore.” (See MNI INTERVIEW: Independent Fed Key To Inflation Fight-Raskin)

FED CARVEOUT CAVEATS

There is active discussion in the legal community and among market participants about whether the Supreme Court could carve out an exception for the Fed, Menand said, adding he thinks it would be tough to accomplish. 

“The court may be watching the news and seeing that the president is threatening to remove Jay Powell and think we need to put something in whatever ruling we give that says this doesn't apply to the Fed,” he said. 

“The problem is there's no doctrinally coherent, logically coherent way to carve out the Fed. That wouldn't stop the court from just saying this doesn't apply to the Fed. But the thinner the reasoning, the more it invites the president to test it,” Menand said.

The Fed statute authorizes the president to remove Fed governors for cause, but there's no case law in what would constitute cause, Menand said. 

"The President could have certain novel theories there in an effort to remove him. The more the Supreme Court moves the goal posts towards the president, the more he's going to run with the ball.”