Game Over for the Fed?

For decades the Federal Reserve operated like it sat on its own island: insulated, untouchable, above the political fray. Two Supreme Court rulings, Trump v. Slaughter and Trump v. Cook, just rewrote the rules on whether a president can fire the people who run the nation's monetary policy. Kyle Campbell, who covers the Fed and bank regulation for American Banker, joins the show to break down what these rulings really mean, what happens if Trump succeeds in removing Fed Governor Lisa Cook, and whether Kevin Warsh can keep the institution independent, or if he becomes what one senator has called a sock puppet.

What We Cover

(00:09) The pair of Supreme Court rulings that left the Fed as the last agency standing on independence

(02:00) Why the Fed got an exception when the Court said no other agency gets one

(03:54) What happens if Trump succeeds in removing Fed Governor Lisa Cook

(08:19) The safeguards still standing between the White House and the FOMC

(12:47) This week's FOMC meeting, set against an escalating war in the Middle East

(14:05) Whether there is any backchannel between the Fed and the Department of War

(16:00) What a harmonized, single-minded regulatory era means for financial services

Notable Quote

"Be careful what you wish for, because you just might get it. And if you push the Fed and the economy tanks, everybody knows it was by your design." — Roland Howard

About Our Guest

Kyle Campbell covers the Federal Reserve and bank regulation for American Banker. His July 20th article, “What comes next for the Fed's regulatory independence,” sparked this conversation and is linked below.

Links & Resources

● American Banker: What comes next for the Fed's regulatory independence

● Listen on Apple Podcasts: podcasts.apple.com/us/podcast/propagate-fintech-podcast/id1874648654

● Watch on YouTube: youtube.com/@PropagateFintech/shorts

● Follow Propagate Fintech on LinkedIn: linkedin.com/company/propagatefintech

● Learn more: propagatefintech.com

Want to Be a Guest?

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Transcript

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SPEAKER_00 0:01

Today we're talking about something that used to be untouchable, Federal Reserve. For decades, it operated like it was on its own island. Untouchable, inflated of the political fray. That era has just ended. Two Supreme Court rulings came down in the past two weeks. And between the two of them, they really just rewrote the rules on whether President can fire people who run nations monitor. Reading the rulings line by line of USI. So getting into what these rulings really mean, what happens if Cop 16 removing the governor at least a cut and whether Kevin Ward can keep this thing independent, or if he becomes what one senator calls a stock bucket. Let's get into it. Give it to me straight here. Did every other agency just get chopped at the knees with the Fed being kind of a proverbial last man standing here? What's what's going on?

SPEAKER_01 1:05

Yeah, that that is pretty much what has happened thanks to these pair of rulings from the past uh past few weeks. But at the same time, this is uh an outcome that I think a lot of people saw coming for a while. Um, you know, this is kind of how the Supreme Court operates. They forecast things and decisions that were made in the past that ultimately get undone. It's kind of like death by a thousand blows, but uh we definitely had the ultimate blow uh for pretty much every other agency uh in in the government besides the Fed.

SPEAKER_00 1:36

Got it. I guess you know, the CFPB, they're dismantling the the current kind of narrative around agencies and I guess you could call it bureaucracy are perceived in the wild by this administration. It's coming as no surprise to many people.

SPEAKER_01 1:53

That's right. Yeah. I think the what is sort of surprising is that I think some people thought that there was more legislative protection, or at least um judicial protection, uh, for these agencies that were deemed to be independent. And uh independent has typically meant that you are insulated from being sort of removed if you're appointed and confirmed by the Senate that you can't just be fired for no reason. The way it has been described to me is like you either don't show up to the job or you show up drunk. You know, like it's like that was that was sort of the standard, uh at least what was thought to be the standard. And now it's basically, hey, like even if you're in one of these like independent agencies, you can be let go just the same way as if you're uh working for you know the justice, you know, the Justice Department, the Defense Department, these sort of like you know, more traditional cabinet level appointees. So that distinction really doesn't exist anymore thanks to these Supreme Court ruling that had sort of a an adjoining ruling that came out at the same time that was just about the Fed.

SPEAKER_00 2:54

And so the Fed is in theory independent. Yes. However, if you know push come to shove and to use Warsh's wording here, he could be turned into a sock puppet.

SPEAKER_01 3:06

Yes. And I will say that I think Warsh was sort of uh channeling Elizabeth Warren there because she loves to use uh that sort of imagery, the sock puppet. Uh but yeah, yeah, the idea is um so you had these two cases. One is uh Trump versus Slaughter, which has to uh do with an appointee to the Federal Trade Commission who was fired by Trump last year. Uh she basically said, Hey, I'm an independent um agency head. You can't just fire me without cause. Uh the Supreme Court said actually, yes, yes, they can. And there's really no such thing as an independent agency in the traditional sense of this sort of insulation from presidential firing. Uh but they did say that that there was an exception for the Fed, and that was sort of fleshed out in another decision which came out on the same day, you know, end of June, which was uh Trump versus Cook, which is a case involving a sitting governor on the Fed who Trump has tried to fire. And the Supreme Court basically just said, yeah, the Fed's different uh because it's different. I mean, if you kind of dig into it a little bit, they go into the the history of central banking in the United States, they say that there's a sort of a time-honored tradition here that central banks should be independent because we want to have monetary policy totally protected from the sort of whims of of politics. But people who are sort of sophisticated watchers and and readers of the Supreme Court say that this this decision is is a little bit shaky and doesn't really uh justify the conclusion beyond, I guess, a shadow of a doubt.

SPEAKER_00 4:46

Let's say what do you think will come first? Trump pushing the precedent or there being another ruling inbound?

SPEAKER_01 4:55

Yeah, so I think that Trump will continue to try to push the precedent by continuing his effort to remove Lisa Cook, who's the governor who was involved in the uh the Trump versus Cook uh case. I the Supreme Court what they did is they didn't say that, hey, you cannot fire a Federal Reserve governor. They just said that you couldn't fire one the way that Trump has tried to, which is that you couldn't just sort of say immediately, hey, like you're done, get out of here. You have to go through a process. So I think the Trump administration will go through that process, and as that process plays out, it'll set a precedent for what sort of bar has to be met for removal. And that could be a very high bar, it could be uh a relatively low bar. We'll see over time, but that's gonna take some litigating that it'll probably run. That process alone could take till the end of Trump's uh term. Uh, we'll see. There are some other potential uh cases involving the fed the uh yeah, the Fed that could end up in front of the Supreme Court. Maybe they pick away at this issue of removability, but I don't think it's gonna be a sort of a slam dunk. I think if they if they're if any of these cases do reach that level, they'll probably just be sort of incremental in the way that this this ruling was. So I think you're gonna really need to get Cook all the way to the end and then have the Supreme Court really be pushed to make a final ruling. And I think that'll probably be many years out, but we're in this limbo state until then.

SPEAKER_00 6:30

Got it. So let's so let's take it to the end here. You know, let's say that Trump is able to fire Cook. How does that change tactically, operationally, strategically, the the relationship between the president and the Fed?

SPEAKER_01 6:47

You know, nobody really knows. And the thing is a lot about what the Fed, the way the Fed operates, um, is they try to avoid stepping over any hard lines, you know, which is to say if there's uh something that is sort of questionable, uh they they kind of take a wide berth. So a a really good example of this is on regulation. So the reason that the Fed is the sole independent regulator is that it it regulates bank holding companies, it regulates banks that are sort of state chartered members of the Federal Reserve System. So it has a pretty large remit as a regulator. And it could, in theory, use that to say, hey, we're gonna sort of chart our own course on regulation, regardless of what other regulators want to do, regardless of what the administration wants. But the history is that it has always sort of moved with the pack, so to speak. It's always said, hey, you know, we're gonna do joint rulemakings when we change a regulation with the OCC and the FDIC. Or they'll do things that are sort of directionally uh in line with what the sitting administration wants. Like they were a part of this uh thing called the greening of the financial uh system that uh was sort of, you know, you could say aligned with what the Biden administration wanted, and then when there was the change over, they left. You know, and like that was never an explicit, hey, the White House told us to do this, we're gonna do it. It was always just sort of, hey, we're kind of keeping in the spirit of things. I bring this up because this is all sort of exemplify how the Fed just says, hey, if there's an iffy issue, we're gonna keep very, very far from it. So now if we're talking about a situation where, hey, you know, the the the president can fire a governor for X, Y, or Z reason, I'm assuming you're gonna see governors that are sort of saying, hey, we're gonna really, you know, avoid doing anything that could put us into that territory. Um, does it end up becoming a situation where you know it it is just sort of an at-will? I don't know. We'll see. I've heard different things about different levels of concern from people who have a lot of experience in this space. Some say, hey, you know, if you're someone who wants to be on the Fed board, you're gonna sort of vote your conscience no matter what. If the president fires you because of it, you'll you'll live with that. Others say, hey, you know, this is gonna kind of turn it into a crony enterprise where you only get on the board by doing exactly what the president wants. I think there's some safeguards. Yeah, it's the fear. I think there's some safeguards in place to make sure that doesn't happen. Uh, but anything is possible now in this sort of evolving uh reality that we're in. Talk to me about the safeguards. What are they? Um it still is hard to put someone on the Fed board, right? So what these decisions do is it makes it easy for the president to remove someone, which you know, there are situations where you're standing one vote away from your preferred policy outcome uh and you just fire this person and like and that's that's all you need. That I see as being an uncommon situation. Usually it's gonna be like if you're if you're really trying to move things in a totally different direction, you're gonna have to put people on to have a like mind with the president. And the appointment process to get onto the board of governors is still it's still a pretty substantial one. We've seen even under Trump where Republicans pretty much go along with what the president wants, uh they will still sort of hold the line on the Federal Reserve. They did this in the first administration, they kind of waived off, you know, probably three or I think it was two or three candidates uh for the Fed board that that Trump either formally nominated or talked about nominating. Uh, they just said, hey, these people are too far outside the mainstream, we don't want them. And then you saw that a little bit with Warsh in that Senator Tillis, who's on the Senate Banking Committee, said, Hey, I will not uh move Warsh forward, I'll I will vote against it with you know the Democrats until the you know the administration drops the investigation into power. So there there he wanted to make sure that there was this you know sort of separation as best as he could. So unless we see a real change, a real radical change in the Senate and how they approach the Fed, I think that the appointment process is still gonna be a good governor on who actually gets onto the onto the board and who actually gets a vote uh on an FOMC.

SPEAKER_00 11:15

Okay. So there is there's kind of enough sacrosanct perspective on the Fed and the way it operates that uh people don't want to mess with it too much.

SPEAKER_01 11:27

I think so, yeah. And you know, there's a history of when presidents pick a fight with the Fed, uh it doesn't really look good for them. You know, the voters don't like it. And I think there are more red lines on this for the administration or future administrations to to sort of steer clear of. Uh and they're not, again, they're not necessarily legal red lines, but it's you know, it's the popular sentiment. People like a Fed to be independent. They like to feel like we're in the hands of technocrats on on this particular subject.

SPEAKER_00 11:56

Got it. Yeah. So if you're the president and you want to go head to head with the Fed, uh you got to be careful. And there's an expression that uh our 98-year-old grandma uses that I think is great. And it's be careful what you wish for because you just might get it. Yes. And, you know, if you push the Fed and you get what you want and you get the, let's say, the rate that you want, and the economy tanks. Well, everybody knows that it was really kind of by your design. Right. And so is that it's like a theoric victory scenario. Absolutely.

SPEAKER_01 12:30

And yeah, I think you've seen some presidents who kind of acknowledge that they would rather have that distance so you can you can kind of scapegoat the Fed a little bit. Um, you know, there there wasn't really a whole lot of exchange between Biden and the Fed, but his approach was basically like we're gonna leave inflation to the Fed, which is to say, like, hey, if inflation, you know, goes through the roof, that's the Fed's fault. If rates have to be jacked up to stop it, that's the Fed's fault. And honestly, if you're an elected official, I you know, there's a lot of logic to that to say, hey, like we want to have something that we don't have control over or or we, you know, we can't control because you know, then it's it's you can't wear the blame for it. You know, there's there's not really usually there's usually not a lot of credit given to the Fed when things are fine. I mean, we've had some periods like um, you know, the Greenspan area where the Fed's gotten a lot of praise. Uh, but typically it's either operating in the background, nobody's paying attention to it, or everyone's mad at it. And uh, you know, if I'm a politician, I think I would I probably wouldn't mind having that uh that sort of relief valve.

SPEAKER_00 13:38

Sure. Sure. Nice little off-round. Yeah. So something's happening this week with the Fed. Talk to me about what's going on.

SPEAKER_01 13:46

Yeah, so it's the uh Federal Open Market Committee meeting, which is usually where the chair gives a big speech, sort of about the course of action for the the second half of the year. But this coming meeting will be a chance to see how the Fed deals with an escalation in the war in the Middle East. The last FOMC we were in sort of a cooling moment for tensions with Iran, and we're seeing price level inflation uh slowing down. But now we're seeing prices tick back up. So the Fed's gonna have to make a real judgment call here. They can't just say, hey, here's our our classic data points. They say do this, we're gonna do it. Uh they can they can do that, but then they're gonna have to explain why they're looking past what's going on with oil prices, with treasury yields. The Fed's gonna have to really explain its rationale for whatever it does. That's gonna really test this limited communication uh regime that Warsh has championed thus far.

SPEAKER_00 14:43

Got it. Do you think that the Fed has any connectivity into the Department of War? Like, is there any type of interplay between these two organizations? Because obviously what one does impacts the other.

SPEAKER_01 14:59

Yeah, it's a great question. If you look back through history, there have been moments where this interconnection is very clear. Um, in fact, like the moment where we sort of first had uh this concept of an independent Fed going back to the 1940s, really, it was over the financing of the Korean War. And the Fed basically said, hey, we're not gonna kind of go along with what the administration wants, which is low rates to you know finance the war. We're in a very different environment right now on many fronts. I don't think that there's that sort of we need to lower rates or or so or anyone saying, hey, Fed, lower the rates so we can finance the war more easily, because right now the biggest hurdle to financing the ongoing conflict is is through Congress. But uh, I do think there are some overlaps there. Are they talking to each other? I don't think there's really a lot of history about there being coordination between those two parts of the government, but we'll have to see that over time. Uh, because certainly the Trump administration has tried to really centralize and consolidate things. Uh, if we do find out that there's been some some communications between you know those two parts of the government, I think that would be uh it'd be interesting, it'd be precedent setting. But I don't think that that's sort of a day-to-day driver on the mission for for either the Fed or or the War Department.

SPEAKER_00 16:21

Got it. Okay. Maybe it's happening on the golf course, but no one no one will know.

SPEAKER_01 16:25

Right, right. Or maybe it's you know happening through Bescent, if Bescent is talking to Heg Seth on one call and then talking to Warsh on another. I mean, there probably is some level of that going on, uh, but again, like our the pain point route right now for financing the war is Congress. And so we'll have to sort of see that's a first step. And then what that does to how we finance that, the cost of it, you know, that'll sort of uh be seen in the fullness of time.

SPEAKER_00 16:54

Got it. So, Kyle, let me draw you out on the independence factor around these government agencies. So the Fed is the only one left now. What does that mean? Are we in a Wild West from a regulation perspective?

SPEAKER_01 17:07

Well, we're in a a new era for sure. I think what we're gonna see and have seen during the Trump administration thus far is uh a lot more harmony among financial regulators. You know, they're they're on the same page more so than they have been in the past. Uh whereas one of the legacies of this um sort of independence uh for certain agencies, this sort of trust in technical experts is that each of these agencies has been able to say these are our priorities, this is what we're gonna focus on, this is how we're going to approach you know X, Y, and Z. And that may have overlap with other agencies, but if our prerogatives do not align fully with you know this other agency's prerogatives, we're gonna live with that. That's fine. And now what we're seeing is you know, everything is sort of unified for better or worse. You may see these uh policies as being pro-growth and and helping pave the way for innovation. You may see them as being a little bit reckless and kind of encouraging uh a lot of risk taking. However, you view it, we're not sort of guessing how one part of the government is going to uh interact with the other. So that could have implications near term, long term. You know, I think there certainly is a bit of a pendulum effect that we could see if there's a change of administration. Perhaps a Democratic president uh says we're gonna take this unified approach and be pro-regulatory. You know, we're going to uh to to really clamp down on things. And then you sort of you'd have sort of an acceleration or uh or an exaggeration of what we've had to this point uh of over the past several administrations where regulation goes on and off. And I I don't think I don't think that that's necessarily a good thing for the business cycle if you're having to try to anticipate what your regulator is going to do next. So uh that's definitely something that everyone throughout financial services should keep an eye out for. There is still a little bit of a buffer in the sense that you need to have the heads of these agencies be Senate confirmed, and perhaps that is a little bit of a governor going forward, but it's definitely we're definitely setting up for an area of bigger swings on the policy front going forward.

SPEAKER_00 19:18

Interesting. Okay. Well, I guess we all better buckle up here. So a lot of what we talked about today stems from an article that you published on July 20th. I will include a link to the article uh in the show notes of this episode. Appreciate that. And uh it's great to be here, Roland.