watching-yellen

Yes, Trump Could Fire Yellen

May 18th, 2017 by

Unless you’ve been living under a rock for the past few weeks, you probably know that the White House has stirred up a great deal of controversy after President Trump surprisingly sacked James Comey, the Director of the FBI. The fallout from this decision, which was seen as impeding the Bureau’s investigation into the Trump campaign’s alleged connections to Russia, has still yet to clear. If anything, the situation has only gotten cloudier.

The Russian investigation aside, this decision could have implications for the Federal Reserve, which has long been in Trump’s crosshairs as an institution ripe for criticism and potential reform. Could the head of the Fed, Chair Janet Yellen, meet the same fate as Comey under President Trump?

An Independent Fed?

The short answer is yes, contrary to most reports on the subject, President Trump is well within his legal power to fire Yellen as the Fed Chair.

500px-US-FederalReserveBoard-Seal.svg

The prevailing wisdom has been that the president does not have this kind of authority. There are a number of legal firewalls that protect the activity of the Fed from political interference. Some of the normal checks and balances apply to the central bank, which is the de facto fourth unelected branch of government: Its governors are appointed by the president, and go through the Senate hearing and confirmation process. Congress has oversight powers in the matter, and gets to grill the Fed Chair twice a year at public hearings held on separate days in front of the House Financial Services and Senate Banking Committees. The legislative branch also sets the Fed’s mandates, which are currently full employment and a stable U.S. dollar. (A 2% inflation target is the Fed’s third “unofficial” mandate.)

Otherwise, the Fed indeed enjoys a great deal of independence. Its decisions on interest rates are not subject to the approval (or second-guessing) of either the Congress or the White House. Its members do not represent constituents and cannot be voted out of their office.

We have repeatedly heard that Trump, nor anyone else, can fire Yellen before her tenure is up. Doesn’t the Fed’s independence protect it from such unilateral decisions by the executive branch? Surprisingly, this is not necessarily true!

Authorized by Law

Federal Reserve photo: Public Domain

40 Years Of Federal Reserve Leadership:
(L-R) Janet Yellen, Alan Greenspan, Ben Bernanke, and Paul Volcker

Pedro da Costa of Business Insider managed to dig up the specific statute that codified such an authorization for the president. In addition to the original 1913 law that authorized the creation of the Federal Reserve in the first place, the Banking Act of 1935 and other subsequent laws revised the language of the Federal Reserve Act. The law currently stipulates that members of the Fed Board of Governors can be “removed for cause by the President.”

What does Trump think of Yellen? He was rather critical of her during the campaign, accusing the central bank of keeping interest rates low as a favor to the Obama administration. Trump appears to have warmed up to Yellen since taking office, saying on the record that he respects her and actually is a fan of low-interest-rate policy. Then again, the president had expressed similar support for Director Comey and former national security advisor Michael Flynn before both were sacked.

watching-yellen

This raises the question: Why would Trump fire Chair Yellen? The law does require there be a “cause” for the removal, although that can be satisfied by any number of explanations. One can easily envision a scenario in which the Fed continues on its path of raising interest rates, which could rub Trump the wrong way if he prefers keeping the economy running hot with low rates. Such a disagreement could be grounds, in the president’s eyes, to fire Yellen from her post.

Particularly if Fed policy appears to butt up against the president’s economic priorities in the near future, don’t be shocked if Trump exercises this power to dismiss Yellen or any of her colleagues from the central bank. It would be a Nixonesque demonstration of authority and generate uproar, no doubt, but is hardly out of line with President Trump’s operating principles.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.