Trump can't fire Jerome Powell. Will he try anyway?

WASHINGTON — President Trump this week doubled down on criticism of the Federal Reserve and its chairman, Jerome Powell, for their monetary policy decisions, which raises the question — what is the president going to do about it?

In a wide-ranging interview with The Washington Post published Tuesday night, Trump said he regretted his decision to nominate Powell as chairman of the Federal Reserve last year (he was sworn in in February), seeming to blame the Fed’s gradual increase in interest rates since December 2015 for slowing economic growth and complaining that the U.S. is at a competitive disadvantage with China and Europe.

“At this moment in time I am not at all happy with the Fed. I am not at all happy with my choice,” Trump told the Post. “I’m doing deals, and I’m not being accommodated by the Fed. I’m not happy with the Fed. They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

Andrew Harrer/Bloomberg

Trump has made a habit of kicking the Fed in retaliation for raising interest rates — and, by extension, the prevailing interest rates across the financial system, including those that the government pays on its own debt.

In July he complained in an interview with CNBC that he was “not thrilled” with Powell and the Fed; he followed up the next day in a Reuters interview by saying that “I should be given some help by the Fed” in boosting economic growth by keeping interest rates low. Last month, Trump said that an 800-point stock market dip was the work of a Fed that had “gone crazy.” And that is to say nothing of the tweets.

For his part, Powell has said virtually nothing in response to the president’s attacks. On Wednesday, in a prepared speech to the Economic Club of New York on financial stability, he noted that the effect of gradual rate hikes can be hard to predict, but reiterated that near-constant refrain of Fed chairs past and present: the central bank makes its decisions based on the best information it has when it has it rather than based on directives, political considerations or anything else.

But how much more displeased can the president get with Powell and the Federal Reserve before he decides to do something about it? And what can he do? More to the point, what will he do?

The Federal Reserve is a part of the executive branch of government — like all executive agencies, it was created by Congress to fulfill certain duties on behalf of the public, and the execution of those public charges falls to the executive branch. But the members of the Federal Reserve Board — like the leadership of several other regulators — are protected in their statutes by some qualifier as to the conditions by which they may be removed by the president. In the Fed’s case, a member of the board of governors can only be removed by the president “for cause.”

That “for cause” provision has a back story. For the first hundred or so years, the federal government operated on the “spoils system,” whereby every government employee was effectively appointed directly or indirectly by the president, and as a result federal employees were routinely fired wholesale when an opposing party took office. Thus the “spoils” of political warfare included the hundreds or thousands of government jobs that a new president could hand out to their supporters upon taking office (the more plum appointments, incidentally, being those that offered ripe opportunities for graft).

Besides making government offices more inept and corrupt, the spoils system posed a logistical challenge to presidents, who were routinely hounded by office seekers (with occasionally disastrous results).

Congress ended the spoils system in 1883 with the passage of the Pendleton Civil Service Reform Act, which, among other things, made it harder for the president to fire most federal employees and created a distinction between rank-and-file civil servants and political appointees that serve at the pleasure of the president. Beginning in the 20^th century, Congress found it necessary to extend those protections to the heads of certain agencies as well, and there is some case law on exactly how far that protection goes.

In 1933, Franklin Roosevelt removed William Humphrey from his job as a member of the Federal Trade Commission because Humphrey had been appointed by Herbert Hoover. Humphrey contested his firing, insisting he was still a member of the commission and entitled to his $10,000-a-year salary as such, and sued the government to get back his job and back pay.

Though he died in 1934, Humphrey ultimately prevailed, with the Supreme Court deciding that for government agencies that perform a quasi-legislative or quasi-judicial function, it is constitutional for Congress to impose a limitation on the executive’s ability to fire agency heads. His estate was awarded the back pay Humphrey would have earned had he served out his term.

But the FTC and the Fed use different statutory language to insulate their members from presidential removal. The FTC statute says that a commissioner may not be fired except for “inefficiency, neglect of duty, or malfeasance in office” — standards the court had little trouble establishing did not apply in Humphrey’s case.

So can President Trump remove Powell as Fed chairman? And if the Fed doesn’t set the federal funds rate according to the president’s preference, does that constitute “cause” under the statute?

The short answer is that we don’t know — no president has ever attempted to fire a Fed chairman before (though one was nudged out the door and made Treasury secretary instead). And we probably won’t find out anytime soon, either.

From a purely legal perspective, it would fall to the courts to decide whether President Trump has an expansive or narrow basis upon which to find cause for Jerome Powell’s termination, and for the courts to make such a decision, the president would have to fire Powell, provide some manner of justification for his termination, and that termination would have to be contested by Powell in court. Unlike in the Humphrey's Executor case, Powell was nominated by Trump, so if he is fired, he may choose to go quietly. In that case, game over.

But if the Fed’s monetary policy is the basis for the firing and the issue came before the court, the judge probably wouldn’t consider that an appropriate “cause” for termination. That’s because the federal funds rate is set by the Federal Open Market Committee over which the chairman presides, but on whose decisions he only has one vote. The president can’t hold the Fed chairman responsible for decisions reached by the FOMC as a body.

Another practical roadblock to Trump firing Powell is that the Federal Reserve Act stipulates that each member of the Board of Governors “shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.” In other words, the “for cause” provision applies to the membership on the board, not to a concurrent term as chairman, vice chair or vice chair for supervision.

What that means is that leadership of the Fed would have to fall to one of the existing members of the board — at least in the short term — and none of those members are likely to have significantly different approaches to monetary policy than Powell.

Perhaps the best reason Trump shouldn’t attempt to fire Powell is that it would be economic suicide. Trump’s complaint seems to be that all economic indicators would be soaring were it not for the Fed’s decision to raise interest rates. But just the gesture of firing a trusted and well-respected Fed chairman because he is insufficiently loyal to the president would send markets into a tailspin from which the nation would not easily recover.

Turkey provides an instructive and recent example of that theory in practice. Turkey's president, Recep Tayyip Erdogan, this year moved to exert greater control over monetary policy and the Turkish central bank, causing the value of the lira to plummet. The Turkish central bank recently defied Erdogan’s preferences and raised interest rates to curb rampant inflation, but it had to do so with faster and more drastic rate increases — precisely the outcome that the Fed has been hoping to avoid with its policy of slow, gradual normalization.

And perhaps most important, Trump gets more of what he wants by lashing out at Powell and the Fed in the press than he would ever get by actually firing him. It has become a kind of conventional wisdom that the economy is in the later stages of its business cycle and a slowdown or even recession may emerge in the next year.

Part of that logic is based on the Fed’s raising of interest rates, but it’s also based on volatility in other markets and uncertainty around trade disputes that the president himself has instigated. Powell serves as a perfect fall guy for that downturn because he is not in a position to respond to the president’s attacks.

But as we all know by now, Trump’s gonna Trump. Foreseeable catastrophe and sound legal advice may not be enough to convince the president that firing Powell is a bad idea if he gets it in his head that it might be a good one. As he said himself, “My gut tells me more sometimes than anybody else’s brain can ever tell me.”

Bankshot is American Banker’s column for real-time analysis of today's news.