Can the Fed stay independent?

Katie Martin (0:06)

Pushkin. The new US administration is busy. It's rewriting the rules on global trade, it's rethinking checks and balances, it's dismantling a post-Second World War transatlantic order before our very eyes. One thing it's left alone is the Central Bank, the Federal Reserve. So markets are okay, right? Well, today on the show, we're asking, oh, for heaven's sake, what now? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in lovely sunny springtime London. I'm joined by Central Banking brain box, Chris Giles, who recently wrote about how to kill the feds independence. Chris, stop giving them ideas.

Chris Giles (0:58)

Sorry Katie, it was not a how to guide, but it did seem as if it might be.

Katie Martin (1:06)

So look, first up, Jay Powell, chair of the Federal Reserve, chair of the US Central Bank, every time he opens his mouth right now, which he does through very gritted teeth, he says something to the effect of, no, I cannot be fired, no, I cannot be removed from my position.

Chris Giles (1:23)

Well, he says that and that would have been the correct view as of the election date. In fact, as of today, that is where the law stand.

Katie Martin (1:35)

He's due to be there until what, early 26th, right?

Chris Giles (1:37)

He's due to be chair until early 26th. He can stay till 2028 And normally, a chair when they finish their term and he knows he's not going to be reappointed, would then stand down. But we've seen pretty recently that Michael Barr, who was the vice chair for supervision, stood down from that position because he knew that he wasn't in line with the new administration's thinking, but didn't stand down from the board. Meaning that Donald Trump can't put one of his own people onto the seven person Federal Reserve board.

Katie Martin (2:13)

There is this simmering tension, isn't there, between the Fed and the White House, where Trump is very keen to say that he likes interest rates to be lower. He's a low interest rate kind of guy. The Fed, meanwhile, is not a political animal, and it's watching with great interest how inflation has picked up again recently. It's quite sticky. It won't want to cut interest rates into that environment. So you have got this tension there. The mere fact that Jay Powell is having to say out loud, no, I can't be fired, tells you that we're living in pretty extraordinary. I've never seen anything like that.

Chris Giles (2:51)

No. It just would never have occurred.

Katie Martin (2:54)

No, never ever. So now you've got this tension, as you say, that Barr made this quite unusual move. But theoretically, not that we are giving anyone ideas here, but if the president did want to change personnel, shall we say, within the Federal Reserve, how would you suggest that he could go about that?

Chris Giles (3:16)

So theoretically, again, it's actually easier than you think. And it will come down, we know, to the Supreme Court, because it's already in progress. This is the important thing. Not at the Fed, but at the National Labor Relations Board.

Katie Martin (3:33)

Okay, what's that got to do with the Central Bank?

Chris Giles (3:35)

Well, because both of these boards have what's known as a multi-member board. So they have more than one person who governs them and takes decisions. And Donald Trump, very early in his presidency, fired a woman called Gwynne Wilcox, who happens to be a black woman from the board of the National Labor Relations Board. And she's suing.

Katie Martin (3:59)

Right.

Chris Giles (4:00)

Because he fired her for no cause at all, just, I don't like you, get out. In her contract, she was given the contract by Congress, just like the Fed, it says that you have to have cause. You have to cause some gross misconduct in office to be fired by the president. So he's fired her, she's suing. We've now seen a couple of days ago that the attorney generals of California and other people are coming in on her side. This is going to the Supreme Court. There is no doubt about it. This is going to the Supreme Court. It's a massive test case. It's quite likely she will lose. I hate to say this, it's quite likely she will lose because the Supreme Court has been going in a direction already of saying actually Congress, it's unconstitutional for Congress to give these sorts of powers to these sorts of boards. It's already said this for the Consumer Financial Protection Bureau and the only reason this is different is there was one person in charge and this is a multi-member board. If they change the rules for the National Labor Relation Board, that means anyone on the Fed can be fired at the president's whim and that's quite likely to happen.