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Donald Trump’s campaign to oust Jerome Powell and Lisa Cook from the Federal Reserve Board is an epic battle over just how much the president ought to be able to control interest rates and the economy—and the government as well. It’s hard for him to throw much more of the federal budget at the economy than he already has, and he’s infuriated that the Fed has kept rates much higher than he thinks is necessary.
Trump, after all, is a builder, and builders like few things more than keeping the price of money low—they don’t have to pay as much for things, and buyers have an easier time affording what they’re selling.
Builders around the country hammered away at that message during Paul Volcker’s term as Fed chair in the 1980s, when interest rates were three times higher than today. They filled the Fed mailroom with foot-long pieces of 2x4 lumber. Interest rates were so high, they complained, that they couldn’t sell the lumber for use in homes and buildings, so they mailed it to Washington to make their point.
Nixon squeezes the Fed
But understanding the risks means digging back into the Fed’s history during an even earlier point—the Nixon years.
On the day respected economist Arthur Burns took the helm of the Fed in 1970, Nixon joked, “I respect [his] independence. However, I hope that independently he will conclude that my views are the ones that should be followed.”
It soon became clear that this was no joke. According to presidential aide John Ehrlichman, Nixon thought of Burns as his “own man” at the Fed. As Ehrlichman later told me, Nixon warned Burns shortly after he took office, “You see to it: no recession.” A few weeks later, Nixon told Ehrlichman and Bob Haldeman, another senior aide, “The Fed must loosen—it must risk inflation.” The closer Nixon got to his 1972 reelection campaign, the stronger he tightened the screws on Burns. Burns resented Nixon’s constant meddling, but that didn’t stop the president.
Nixon gave a speech in which he told business leaders he had consulted with Burns and was assured that the Fed would supply enough money for strong growth. Burns pushed back, and Nixon fumed to his senior staff: “I’ll unload on him like he’s never had.” The president worried that Burns would sabotage his campaign with tight money and slow growth. On Air Force One, Nixon told Ehrlichman to demand loyalty of Burns and tell him he’d be held personally responsible if the economy slowed. Burns kept interest rates low, inflation stayed down, the economy remained strong, and Nixon won reelection.
But the good feelings did not last long. In 1973, interest rates began to soar and inflation got out of control. Burns got the blame, and Jimmy Carter decided not to reappoint him as chair. His successor, William Miller, struggled on the job, and Carter rotated him over to become Secretary of Treasury. In his place, Carter appointed Paul Volcker, who jammed on the brakes to slow inflation even at the cost of slower economic growth, which in turn contributed to Carter’s loss in the 1980 campaign.
Trump squeezes Cook
Trump knows that failing to make good on his campaign promise to boost the economy could flip one or both houses of Congress to the Democrats, and nothing would clip his political wings more. He wants lower interest rates for the same reason Nixon did.
His first instinct was to push Powell out of the Fed chair’s office, but the skittish reaction of the stock and bond markets scared him away from that course of action. Instead, Bill Pulte, Trump’s appointee to head the Federal Housing Finance Agency, the regulator of federal home lending agencies, gave him a way to attack Lisa Cook.
Pulte claimed that before Joe Biden appointed Cook as a member of the Federal Reserve Board she had claimed two different properties as her principal residence, one in Ann Arbor and one in Atlanta. That, Pulte alleged, constituted mortgage fraud. He also alleged that Cook was renting out the two properties. Then Pulte added an additional charge: that Cook also bought a condo in Cambridge, Massachusetts, as a second home, but ended up turning it into a rental property.
The first charge was bad enough, Pulte said, although it happened before her appointment. But the second happened while she was on the board. Late last month, Trump announced that the charges justified his decision to fire her immediately.
Can he do that?
The decision set Washington on fire. Trump loyalists saw it as a way to get a critical vote to lower interest rates. Fed loyalists were furious: they said the president did not have the power to dismiss Cook as he did. As with so many other big Trump decisions, this one immediately ended up in federal court. A judge—and ultimately the Supreme Court—will have to decide whether the president can do that.
Can he? The 1913 act creating the Fed does indeed give the president the power to remove a Fed board member “for cause.” But what does that mean? Trump claims that Cook had committed bank fraud, and that provides him with the cause he needs to fire her.
In the 112-year history of the Fed, however, no president has ever attempted to fire a Fed board member, and the “for cause” portion of the statute is completely untested. Trump says he fired her. She countered that he had no power to do so and sought an injunction in federal court.
Can a sitting Fed governor (as board members are known) be fired on a charge not yet proven in court? Does the president have the power, apart from the legal system, to decide on the guilt or innocence of an appointee of an independent agency like the Fed? Is the president’s judgment of “cause” absolute and, if so, what standard must it meet? Is there some due process requirement and, if so, who can enforce it? Does the judicial branch have an independent say on the issue? Is there an appeal? And what about Congress, to which the Constitution vests the monetary power and which delegates monetary policy to the Fed?
The best clue we have on these questions is the 1935 case Humphrey’s Executor, in which the Court argued that presidents can only remove officials from independent agencies “for cause.” The Court sidestepped the question of just what this meant, however, except to say that Congress could set the standard in the law.
In Cook’s case, this takes us back to the Federal Reserve Act and its simple standard: presidents can only remove Fed governors “for cause.” Figuring out what that means has the makings of a constitutional brawl, especially because the Fed sits at the uneasy boundary between executive and legislative powers, while the issue will be decided by the judicial branch.
Can we just skip the hard stuff?
Trump’s attorneys have anticipated this issue, and they’ve tried to skip right past it to wrap the decision in Article II of the Constitution. At the end of his letter firing Cook, Trump wrote, “The executive power of the United States is vested in me as President and, as President, I have a solemn duty to ensure that the laws of the United States are faithfully executed. I have determined that faithfully executing the law requires your immediate removal from office.”
This pushes aside the question of what “for cause” means and claims that the president has the power to fire Cook—and any other appointee—because the broad, vague language of the Constitution gives him the power to do what he wants. At a marathon cabinet meeting on August 26, Trump said, “Not that I don’t have—I would—the right to do anything I want to do. I’m the president of the United States.” And “for cause” is a hard standard to define, and an even harder one to police, as legal experts Jack Goldsmith and Aditya Bamzai have explained.
So Trump says he has the right to fire Cook for two reasons. First, he claims the power to fire her “for cause,” and that the allegations of mortgage fraud constitute “cause,” even though none of them have been proven in court. Second, he claims that, in any event, he has the power to fire her because of the powers inherent in the presidency.
You can pick which of these two positions is more alarming: defining “cause” as whatever the president says it is, or claiming the right to fire anyone because the president is the president.
The latter claim, if upheld by the courts, would spill over to any executive branch employee. Trump could use his claim of unitary executive power to fire government employees with civil service protections. So the courts will have to pick their way through this constitutional minefield carefully as they decide just how broad a precedent they want to set.
And either claim would put national economic policymaking at risk. Presidents have an insatiable taste for easy money, and easy money paves an irresistible path to inflation.
Why the Fed is independent
That’s precisely why an independent Fed has emerged over the years, long before Nixon squeezed Burns. During World War II, the Fed kept interest rates low because the Treasury needed to borrow vast sums of money to finance the war effort. That’s why movie theaters held campaigns in their lobbies to fuel war bond sales.
But the Treasury had gotten used to paying little to finance the debt, and developed a strong taste for cheap money that endured long after the war. During the war, short-term borrowing only cost the Treasury 3/8 of a percent. Keeping rates at that level when the war was over allowed inflation to pick up. It hit nearly 18 percent by 1947 and 21 percent as the Treasury borrowed money to fight the war in Korea. The Fed was increasingly worried about what it had gotten itself into.
President Truman brought the entire group of Fed policymakers to the White House and said the Fed had “pledged its support … to maintain the stability of Government securities as long as the [war] emergency lasts.” Truman was happy—but the Fed was not, because it hadn’t agreed on any such thing. The Fed released its own very different minutes of the meeting and, as Fed Chair Marriner Eccles wrote later, “The fat was in the fire.”
Fed and Treasury officials quietly met to work out a compromise. They produced what became known as “The Accord,” which laid out the plan that has guided the relationship since: the Fed would work to assure the Treasury could meet its borrowing needs but the Treasury would agree to support the Fed’s efforts to keep prices stable. Without the Accord, pressures like Nixon’s campaign for easy money would risk pushing the country constantly into inflationary spirals.
So not only is the Cook case about what “for cause” means in removing government officials and about just how far the president’s power goes in governing the executive branch. It’s also about what expectations every American ought to have about stable prices and economic growth.
This is all a pretty big deal.
Donald F. Kettl is Professor Emeritus and Former Dean of the University of Maryland School of Public Policy. He is the author, with William D. Eggers, of Bridgebuilders: How Government Can Transcend Boundaries to Solve Big Problems.
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