Preet Bharara:

From CAFE and the Vox Media Podcast Network, this is Stay Tuned In Brief. I’m Preet Bharara.

With Donald Trump soon to be sworn in as the 47th president, he’s made clear he wants to shake up Washington, including possibly firing Federal Reserve Chair Jerome Powell. But does he actually have the legal authority to do that? Powell says Trump doesn’t. To help us understand this looming standoff, I’m joined by political scientist Sarah Binder, co-author of The Myth of Independence: How Congress Governs the Federal Reserve. Sarah, welcome to the show.

Sarah Binder:

Great. Thank you for having me.

Preet Bharara:

So you’ve got a lot of explaining to do for us.

Sarah Binder:

Don’t we all.

Preet Bharara:

Let’s start at the top before we get to the Jerome Powell issue, which could end up being somewhat dramatic at the outset of Donald Trump’s term or second term. Remind us what the Fed does and what Chairman Powell’s job is.

Sarah Binder:

Well boiled down, the Fed has two jobs given by Congress. One, keep inflation low, and prices low and stable. But it’s got a second job too, which is give us a healthy, robust jobs market. And sometimes those come in conflict. So the Fed’s got the job of doing what Congress tells it to do. And Fed Chair Powell here is really runs the board. We can get into the craziness bit of a weird institution because there’s a-

Preet Bharara:

Right, because he doesn’t have just one job, right?

Sarah Binder:

Well, he wears, I suppose, a couple hats. He is the president appointed, Senate confirmed Chair of the Federal Reserve Board, which is the seven members, the seven governors in Washington. He also, selected by his colleagues on the board and on this system of 12 Federal Reserve banks, they elect him each year by practice to be the chair of the Federal Open Market Committee, the FOMC. It’s the body that actually makes decisions over most parts, but not all, of monetary policy, in particular setting interest rates.

Preet Bharara:

So let me ask this question because my experience is mostly on the legal judicial side. Does someone have to be nominated by the president and confirmed by the Senate just to be on the board? Not the chair, but just to be on the board?

Sarah Binder:

Yes.

Preet Bharara:

Okay.

Sarah Binder:

So of those seven governor positions, they all need confirmation.

Preet Bharara:

Okay. So is this like the Supreme Court, insofar as you get nominated to be on the Supreme Court, you’re an Associate Justice of the Supreme Court, but you can’t just take someone who’s already on the Supreme Court and make them the Chief Justice. That person has to be re-nominated and have a separate vote in the Senate to be the Chief Justice. Is the Federal Reserve like that? Or can someone who’s just a member be elevated to chair?

Sarah Binder:

Well, at the origins of the Fed going back 100 years, and all the way to the 1970s, the president could just name someone who’s been confirmed to the board, but just name them to a four-year term as chair. Starting in the ’70s, Congress changed the rules. They didn’t like that. They wanted to have some greater sort of oversight and sort of accountability of this chair. And so now the chair not only gets confirmed, one confirmation vote to a seat on the governor on the board, but there’s a separate confirmation vote to be the chair for a four-year term or a vice chair for a four-year term.

Preet Bharara:

Okay. So remind us one more thing. Who appointed Jerome Powell to be chair of the Federal Reserve?

Sarah Binder:

Well, like many Fed chairs, he’s been appointed by more than one president. So he had been appointed to the board by President Obama. But then it was Trump who appointed him chair, again, elevating him to the position of chair in 2018. And then Biden facing a decision in ’22, “Hmm, should I keep Jay Powell or shall I find my own chair?” And he went with sort of the old model for the Fed, which is to have the chair to stay for another term.

Preet Bharara:

Okay., So I’m going to use a technical term. Why is Trump so pissed off at Powell? And in your answer, discuss obviously there were inflationary issues and problems in the recent past, but at the moment I think the consensus would be the Fed is doing pretty well at one of its two principle jobs as you articulated them, keeping interest rates low.

Sarah Binder:

I think he just wants rates as low as possible. And we know that in part from the first term, rates were already low. He was pushing for negative rates, even lower, where the Fed was just not going to go.

Preet Bharara:

Part of what Trump wants is to have control over all parts of government, whether properly in the executive branch or not, whether fully governmental or quasi governmental. That’s how he thinks about the Justice Department. He doesn’t believe in the independence either by norm or otherwise of traditionally independent institutions. One is the Justice Department. Another one is the Fed. How much of this is just that Trump wants control in your mind?

Sarah Binder:

Well, I think that’s certainly a lot of it. We know he wants loyal people, and by that we mean he wants people who will do what he tells them to do. And that’s complicated when you have these structures of independence that try to insulate the Central Bank or any other agency or department from what the president wants to do.

Preet Bharara:

Can you describe the tradition and or structural independence of the Fed? How independent is it? Is it supposed to be? Is that a good thing? Is it a bad thing?

Sarah Binder:

Sure. So we can talk about the independence today, what are the features of it, and political scientists think of it in two ways. They think about how insulated are the policymakers from politicians? How independent are the decision makers?

Preet Bharara:

And that relates to the ability to be fired or not, right?

Sarah Binder:

For sure. And so those board members have 14-year terms, which is really quite the longest that you’ll find

Preet Bharara:

And staggered. And they’re staggered, right?

Sarah Binder:

Exactly.

Preet Bharara:

Another good model for the Supreme Court.

Sarah Binder:

So it’s not that the president comes in and has an empty board to fill up. But also the decision-making is somewhat insulated because the Fed doesn’t get appropriations from Congress. It can get its own money from selling bonds. So what does that mean? It’s got a good degree of what we think of as structural independence. And if we lined up like three, 400 independent agencies and bureaus that we find in the federal government, it would probably be at the extremes of independence. But that doesn’t mean that it’s hermetically sealed from politicians. It’s just sitting in the middle of the political system. And it’s got probably the most important job there is in terms of controlling or managing or steering the economy, let alone the global, influence on the global economy. So of course politicians care about what it’s doing and many don’t want to let it do what it wants to do.

Preet Bharara:

Just to be clear, let’s use a couple of examples. A sitting president of the United States, if he were to call up the Fed, the FOMC, the chair, and say, “I don’t want you to raise rates next time.” Or, “I want you to raise rates by a quarter point, not a half a point,” or whatever instruction he would give. Is the proper defensible and enforceable decision by the Fed chair to hang up the phone and say F off?

Sarah Binder:

Well, I think some of that depends on the style of the Fed chair.

Preet Bharara:

Okay.

Sarah Binder:

And we have, historically, there have been quite tight relationships and contentious relationships between presidents and their Fed chairs. But I think about it this way. The most important thing for the Fed, and Powell says this, and Greenspan said this and so forth, is their sort of integrity, that they have to be seen as legitimate.

Preet Bharara:

Yeah.

Sarah Binder:

And if we think they’re legitimate, what does that mean? The public has to have confidence that the Fed knows what it’s doing. And so listening to the President push and push for low interest rates, fine. But the Fed has to demonstrate that it’s not going to do something just because politicians told them to do it.

Preet Bharara:

But which people? So I’m trying to re-examine all of this in my head and be open-minded to the philosophical, legal, and practical arguments here. And I agree with you and that’s the tradition from which I come. But there are people in the public who voted for Donald Trump who think the Fed kind of sucks. I believe Trump and I believe Senator Mike Lee and other people who have indicated criticism for the Fed, and they would say, “Well, I don’t know. These folks weren’t elected. I guess they were appointed. Maybe they don’t know better. Maybe the elected accountable politicians like senators and the president know better.” And for those people, the thing you said about public perception goes the other way. How do you respond to that?

Sarah Binder:

Well, there’s this long tradition, at least 100 years old, of having structurally these independent agencies. And whether it was the Interstate Commerce Commission, whether it’s the FDA, varying degrees of insulation from presidents. Not everybody has to agree with that’s the way the government should run. You have a court that actually doesn’t want to see infringements and restrictions on executive power. So there’s no single answer here.

I think economists would tell you that you get better long-term economic outcomes if you have greater insulation. So in some ways, the proof is in the pudding, of course. But I think the important point here is we’ve seen presidents go after their Fed chairs in the past and they’ve ended up with a lot of inflation and not always long-term success. So you have to take your pick of how you’re going to think about the importance of this insulation of policy makers.

Preet Bharara:

Stay tuned. There’s more coming up after this.

Let’s get to the legal drama. This is interesting to me. I have some experience with flirting with the issue of either resigning or being fired by the sitting president. In my case, there’s no legal, ethical, or other dispute that a sitting president can fire a sitting United States Attorney. My drama lasted 24 to 36 hours because I wasn’t going to take the word of some functionary in Washington who was in an acting capacity to say that my services were no longer required. I had been asked to stay on personally eye-to-eye by Donald Trump, and I wanted to be told, not even by Donald Trump, but someone to represent to me that, “The president himself wants you gone.” And then as soon as that happened, I was gone. What’s going to happen when Jerome Powell, as he has indicated, refuses to step down when Trump says, “You’re fired?” How’s that going to play out?

Sarah Binder:

Well, Powell has told us he’s not stepping down. And it will open up a fireworks about his authority and his ability and the protections that are in the Federal Reserve Act for the chair. And the competing views here are, well, first of all, here’s one legal way this could turn out. You look at the law, the law says as governor you have for-cause protection. And assuming the court respects how for-cause has been interpreted in the past, you can’t take Powell off the Fed if that’s true before his term as governor’s over. And that’s not until 2028.

Preet Bharara:

And you’re saying that’s clear.

Sarah Binder:

That’s very clear.

Preet Bharara:

Okay.

Sarah Binder:

If you look at the sentence that was added in 1977 about requiring Senate confirmation of the chair for a four-year term, there’s no mention of for-cause protection. And I’m not a big legal scholar reader here of the law, but it’s not confusing on the face of it. There’s no weird commas that give rise to alternative interpretations. It’s not there. And so some legal scholars would tell you the default in this situation is, “I’m sorry. No for-cause protection if the law doesn’t say it.” And that would suggest that Powell, in fact, maybe he goes to court, but then it’s in the hands of the courts, and it’s in the hands of the Supreme Court.

Preet Bharara:

But as a functional matter, given your interpretation that you just described, Powell could be demoted to standard governor.

Sarah Binder:

Absolutely.

Preet Bharara:

But he would be taken off the chair position. But what happens in the interim? So we talk about legal cases all the time. Often what’s important is what is the status quo during the pendency of the fight? So does he immediately have to step down and then get reinstated after a long court battle? Or does he remain in place? Or I guess the parties would each have to make an argument about what the status quo should be.

Sarah Binder:

Well, if Powell were to stick to his guns here and say, “I’m not going anywhere. I’m going to sue to keep my chairmanship.” A couple things. So if that’s the status quo, we don’t know what a court would do in the short term. His chair term expires in May 2026. And I don’t know how fast it makes it through the courts, if at all. And so I think we don’t know what the status quo would be other than keeping him in his chair.

Preet Bharara:

This may be outside of your wheelhouse, but do you think that Chairman Powell, if he refuses to resign, can be deported?

I have to make jokes about these things, otherwise it’s-

Sarah Binder:

I hope it’s a joke.

Preet Bharara:

Well, I don’t know. I think it’s a joke. But while we’re on it.

Sarah Binder:

Yeah.

Preet Bharara:

I warned you that I was going to ask you this before we hit the record button. In my world, everyone is aflutter because Matt Gaetz, controversial Congressman, actually no longer a Congressman, he just stepped down, was named to be Trump’s choice to be the Attorney General of the United States. We’re recording this on a Thursday. Maybe it’ll be different by the time people listen to this. But my question for you is, and everyone has their head on fire for good reasons on the Republican side as well as the Democratic side about Matt Gaetz. Who would be the Matt Gaetz equivalent for the Fed? Deportable or not?

Sarah Binder:

Well, the one that comes to mind is I’m thinking Bitcoin. I’m thinking kind of techno boys. And I’m thinking off the wall. I’m thinking Elon Musk. I think you put them in there and he knocks heads. And he does whatever, it seems, whatever Trump tells him to do. So will we get to that?

Preet Bharara:

Yeah.

Sarah Binder:

I don’t know.

Preet Bharara:

All right. Now I’m sorry I asked the question, which happens a lot with me. All right, so putting aside how it immediately plays out and who is in what status quo position, at the end of the day when Trump says, “I’m going to fire Jerome Powell,”: and it’s set up for the courts and it goes up to the Supreme Court, do you have a view on how that might turn out?

Sarah Binder:

Well, we get a couple cues here from the Supreme Court. They kind of go in different directions though. So there’s a case in 2020 where they said the head of the Director of the Consumer Financial Protection Bureau, Congress erred. You couldn’t give that single director for-cause protection, violated separation of powers. Would they do the same for a board that has multi members? They’ve sort of hinted that they wouldn’t, historically. But there’s also a little line in that SELA Law opinion, the little line that said, “Even assuming financial institutions like the Second Bank and the Federal Reserve can claim a special historical status, CFPB is an entirely different league.” Are they hinting that they might treat the Federal Reserve differently? I mean, you never want to be in the same sentence with the Second Bank, which doesn’t exist anymore. But you could imagine possibly they read into the law the importance of the Fed and think of it differently.

But you could imagine an alternative where four to five justices, Republican appointed justices, decide that this is just a constraint, an unconstitutional constraint, on the president’s ability to execute and take care of execution of the law, to have that type of protection for him, especially if it’s not stated in the law.

Preet Bharara:

Yeah. That’s where my money is.

Sarah Binder:

Yeah. Yeah.

Preet Bharara:

But it’s going to take a while. Let me ask you a couple other questions because there have been other options articulated by some. One is the option Trump might have a point of announcing an intent to nominate or nominating a new chair even as Jerome Powell doesn’t step down, which some people refer to as the shadow chair option. How the heck would that work?

Sarah Binder:

Well, I don’t think it would work. It would come off in one way. Either Jerome Powell says, “I’m not standing around for this. I’m out of here.” I don’t think he’d really do that, but neither do we know what it’ll be like with someone hanging around pretending to be a shadow chair.

The second problem is that the markets go haywire, that they want to know who’s the chair? You can imagine bond markets, rates going up, prices going up, and raising the cost of credit, and raising interest rates. You could imagine a problem there, an economic problem.

And so in that case, it’s kind of mayhem. And again, back to what the Fed wants most, it needs to be seen as legitimate, it needs public confidence and it needs public support. We also don’t know what’s Congress doing. What are those Senate Republicans doing, who hold the hands of confirming people? What do they think? Do they think this is a good way to manage the Fed? They might. Are they more loyal to Trump? They might be. So I see chaos if you we’re thinking of him as a shadow Fed chair.

Preet Bharara:

Chaos. That sounds familiar.

Sarah Binder:

It does.

Preet Bharara:

So you’ve mentioned economists and you talked about the markets. So my question is, putting the economists aside, what do the “captains of industry,” the CEOs of major financial institutions in the country want in terms of Fed independence and this clash? What side are they on?

Sarah Binder:

Well, we don’t fully know, because some are quite loyal, friendly, with Trump. And all bets are off with that.

Preet Bharara:

Doesn’t business come first?

Sarah Binder:

We’ll see. But what businesses really want is that they want a plan. They want certainty. They want to know what the Fed’s going to do. And they want the Fed to do what the Fed says it’s going to do. And that’s the problem for having a president trying to run the Fed or tell it what to do.

Preet Bharara:

Right. I mean, look, nobody has a prognosticating looking glass that’s without error. But it must be true that the predictability of what the Fed is going to do will be higher if it’s independent than if it’s subject to a politician.

Sarah Binder:

And that is the theory. That they’re able to say what they’re going to do and to carry it out.

Preet Bharara:

So who’s in Trump’s ear? Why aren’t these people telling, or have they given up on that because he’s his own manager?

Sarah Binder:

Well, they may well be whispering in his ear about this.

Preet Bharara:

They’re too busy whispering about tariffs.

Sarah Binder:

Right.

Preet Bharara:

They don’t have time.

Sarah Binder:

One battle at a time.

Preet Bharara:

Yeah.

Sarah Binder:

So I think it remains to be seen. Granted, Trump 1.0 is and was, different than what Trump 2.0 will be, but he was talked out of it the last time in late 2018 when he was really mad at Jay Powell. Markets probably gave a little concern. Folks were telling him, I bet Steve Mnuchin may have been whispering to him. And so we know he backed down from that. I don’t want to predict that Trump is backing down from anything, but a bad reaction in the markets, as my co-author on my Fed book Mark Spindel, “The bond market’s got a seat at the table too in the FOMC.” So I think we can’t assume that Trump can just bulldoze the Fed. But it would be pretty ugly, I think, for the economy if he does.

Preet Bharara:

Well, you might have answered my final question then with that response, but just so people who are not economists like I’m not understand the gravity or the magnitude of this, because people are often talking about this problem or that problem or this being unprecedented and that being without precedent. If it came down to this clash and it happens and the president decides to fire Jerome Powell and there’s a standoff and the markets go haywire? Unfair, but I like the scale, one to 10, how significant an economic effect is this event?

Sarah Binder:

Well, again, we don’t really know precisely what markets would do, but they would probably be unhappy. But-

Preet Bharara:

But for how long?

Sarah Binder:

One never knows.

Preet Bharara:

Right.

Sarah Binder:

One never knows. And I think the most thing I’ve noticed about Trump is he’s pretty lucky. And so we don’t fully know. We also don’t know precisely what else is going on in the economy were this to come to a head over Jerome Powell. Are we in tariff wars, with Europe and with allies? And are we in tariff wars with China? What else is going on? And has Congress just done a $4 trillion unpaid tax cut? And as they’re about to do a $3 trillion spending, discretionary spending bills, what else is going on? And so I think Trump 2.0, the economy’s going to look a lot different than the first time around, and that’s going to change, I think, what Trump can get away with in terms of how threatening he is and how much defense, like who comes to the Fed’s defense?

Preet Bharara:

Well, and when this comes to pass, you’ll have to come back and do the play-by-play color commentary. Really appreciate it, Sarah Binder. Thank you.

Sarah Binder:

Anytime. Thanks so much for having me.

Preet Bharara:

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