Subjecting the Fed to presidential control would restore political accountability for public policy choices to the elected branches of government.
P resident Donald Trump has fired Lisa Cook from the Board of Governors of the Federal Reserve for lying on mortgage applications; Cook has sued to keep her job. While central bank independence may foster long-term economic growth by keeping politicians away from interest rates, the Federal Reserve Act gives the president cause to remove Cook, and the Constitution demands that the Board and its officers remain under presidential command.
Cook’s firing came after Federal Housing Finance Agency Director Bill Pulte alleged that in 2021 Cook had claimed each of two different properties — a home in Ann Arbor, Mich., and a condo in Atlanta — as her primary home address. In the earlier mortgage document, Cook had pledged to live in her Ann Arbor house as her primary residence for at least one year, unless her lender agreed otherwise or unforeseen circumstances arose. Only two weeks later, Cook made the same claims in the mortgage documents for her Atlanta condo. Under IRS rules, only one primary residence can be claimed per year.
Pulte accused Cook of having “falsified bank documents and property records to obtain more favorable loan terms, potentially committing mortgage fraud under the criminal statute,” and referred the matter to the Justice Department for consideration of criminal prosecution. The alleged fraud could have enabled Cook to obtain lower interest rates and better financing terms for each “primary” residence.
Then last Thursday, Pulte issued another, similar criminal referral regarding a third property (in Cambridge, Mass.) which Cook allegedly had described in her mortgage documents as a “second home,” but which she treated as investment property — and so described it in later filings with the government.
Cook was later named to the Fed Board by President Joe Biden in May 2022 and reappointed to serve a full 14-year term in September 2023, which was set to end in January 2038.
Trump’s decision to fire Cook does not launch a frontal attack on the independence of the Fed. The Federal Reserve Act creates a Board of Governors with a complicated structure, apparently designed to insulate the Board to some degree from shifting political winds. The Board consists of seven members who are appointed by the president with the Senate’s advice and consent. The statute gives each governor an exceptionally long term of up to 14 years. Terms are staggered so that no single president can easily change the membership of the Board. Both the chairman of the Board (currently Jerome Powell) and two vice chairmen are members of the Board. In their leadership positions, they serve four-year terms; as governors, they have 14-year terms. But any governor may be “removed for cause by the President.” The statute does not define “cause” for removal, nor have the courts interpreted that language. That statute also makes no provision for any form of notice or hearing before the president can exercise his removal authority.
By claiming that Cook’s misrepresentation on her mortgages satisfies the “cause” standard, Trump is not attacking the Fed statute directly, but rather is complying with its terms. He can bolster his claim by comparing the law creating the Fed with those of the other agencies.
In some cases, the statutes creating other allegedly independent agencies spell out the specific grounds for removing officers. In the 2021 case Collins v. Yellen, the Supreme Court noted some of these variations, including “inefficiency, neglect of duty, or malfeasance in office,” “good cause, physical disability, mental incapacity, or any other condition that substantially impairs the performance of [his or her] duties,” and “inefficiency, neglect of duty, or malfeasance in office.”
The Fed’s statute does not include such specifications. Therefore, as the Court concluded in Collins, a plain vanilla “for cause” restriction, like that in the Federal Reserve Act, “appears to give the President more removal authority than [these] other removal provisions.” The Fed statutes cannot be read to limit removal of Fed governors only for actions taken while in office, or that were private in character, or that do not directly concern the execution of an appointee’s official duties. If, for example, Cook lied about the statements in her 2021 mortgage documents while being interviewed by FBI agents for her fitness to serve as a Fed governor, that could be “cause” for her removal, even though both the statements in the documents and her later account of them preceded her actual tenure of office. Nothing in the text of the statute even requires that removal be based upon an allegedly criminal act.
The legislative history of the Fed statute confirms this understanding. The Congress that drafted the current form of the law had before it the Supreme Court’s then-recent decision in Humphrey’s Executor (1935), which concerned President Franklin Rosevelt’s removal of a member of an “independent” agency, the Federal Trade Commission. The language of the statute relevant there restricted the president’s removal authority to cases of “inefficiency, neglect of duty, or malfeasance in office, but for no other cause.” Congress chose not to borrow that language in revising the Fed statute. Instead, Congress wrote the statute broadly enough to give the president substantial powers over removal of Fed governors — perhaps not quite the power to remove “at will,” but nearly as much.
So read, the Federal Reserve Act would implicitly acknowledge that (in the words of Collins v. Yellen) the president’s removal power “serves vital purposes” by “help[ing] the President maintain a degree of control over the subordinates he needs to carry out his duties,” and by “ensur[ing] that these subordinates serve the people . . . in accordance with the policies that the people presumably elected the President to promote.”
To be sure, Cook has not (yet) been convicted of any federal crime, or even (yet) been indicted for one. But neither has she denied that she made at least one false statement in the two mortgage applications she filed within two weeks of one another. Moreover, the charges against her are that she has committed financial crimes — frauds that would have enabled her to obtain better lending terms and lower mortgage interest payments. Given the Fed’s regulatory authority over the banking industry, and its ability to affect interest rates, these are serious charges against any official who would be trusted with exercising such powers. As a Fed governor, Cook must be above any reasonable suspicion of having engaged in financial fraud or self-dealing. Indeed, the very independence of the Fed requires that the integrity of its governors (and other ranking Fed officials) be beyond question.
If the courts were to find that “cause” gives Cook greater protections against removal, then Cook’s firing will reach the constitutional question. Trump has been waging a war against the administrative state’s independence from the very start of his second term, but it is not Trump’s idea. The Supreme Court itself has been engaged in a campaign to render most federal agencies subject to direct presidential control.
Earlier this year, Powell claimed that no resident could fire a governor of the Federal Reserve. This claim was foolhardy. The Supreme Court has waged a 20-year campaign curtailing the independence of other federal agencies. Powell and Cook are not the first government bureaucrats to claim autonomy from presidential removal — which is the only legal means available to the chief executive to compel subordinates to obey his policies. And he may even be the bureaucrat for whom independence is most necessary. But the Constitution requires that every federal officer who executes federal law must sit within the executive branch and must be subject to the president’s direct control. The Constitution imposes on the president alone the duty to “see that the laws are faithfully executed.” He must have the authority to remove subordinate officers to ensure that the executive branch properly assists him in carrying out that duty. The removal power, which itself is nowhere mentioned in the text, must reside in the president so he can ensure that all inferior officers carry out his vision for law enforcement.
The Supreme Court has — haltingly at first, and more confidently now — agreed with this basic principle. In Myers v. United States (1926), Chief Justice Taft had held that the president must have the authority to remove all executive branch officials, even down to the lowest postmaster. But in Humphrey’s Executor v. United States (1935), a New Deal Court at odds with FDR upheld limits on the president’s power to remove the members of the Federal Trade Commission because these agencies carried out “quasi” executive, legislative, and judicial functions — a concept that amounts to gobbledy gook within our Constitution’s separation of powers. In Morrison v. Olson (1988), Chief Justice William Rehnquist relied on Humphrey’s Executor to uphold the removal protections of the Justice Department’s independent prosecutor so as to overcome the conflict of interest of a president essentially investigating himself. That case prompted Justice Antonin Scalia to author the greatest of his dissents, which followed Taft’s Myers opinion to argue that all officials who execute federal law must remain responsible to presidential removal, and hence control.
As on so many issues, Justice Scalia’s dissent would have its day. For the last two decades, the Roberts Court has waged an unrelenting campaign against the independence of the administrative state. The heart of the Court’s effort to limit the agencies has been resurrecting Myers. In 2020, the head of the Consumer Finance Protection Bureau claimed independence from the president because Congress forbade his removal except “for cause.” In Seila Law v. CFPB, the Court held the CFPB law unconstitutional and declared that the Constitution gave the president the power to remove the agency’s head at will. Chief Justice Roberts held that Article II must give the president control over any official who exercises “significant executive power.”
According to the Roberts Court, the Constitution provides only two exceptions to this principle. First, the president need not have removal power over employees who have only “limited duties and no policymaking or administrative authority.” Trump cannot fire all of the secretaries and security guards in federal buildings, for example. Second, the Court refused to overrule Humphrey’s Executor. In a classic example of Chief Justice Roberts’s sometimes unprincipled legal acrobatics, Seila Law held that the president’s removal power would not run to a multi-member board or commission that does not exercise executive authority. While the FTC remains constitutionally secure for now, because the 1935 Court claimed it did not wield executive authority, it seems only a matter of time before the Justices recognize that commissions and boards cannot escape the logic of presidential control over the executive branch.
President Trump’s second term fights with the independent agencies provide the Court with the opportunity to overrule Humphrey’s Executor, though there may still be some vestiges left of it that could protect the independence of the Fed.
Last May, in Trump v. Wilcox, the Court recognized the president’s authority over two “independent” agencies, the National Labor Relations Board and the Merit Systems Protection Board. It overturned lower court decisions that had blocked the firing of commissioners and board members of these agencies, even though the law had given them “for cause” protection from removal. While Wilcox arose on an emergency basis and lacked full briefing and argument, the Court allowed the firings to move forward because “the government is likely to show that both the NLRB and MSPB exercise considerable executive power,” which would render them subject to direct presidential control under Seila Law.
But Wilcox also signaled that the Fed might stand on a different constitutional footing. In response to arguments that the removal of independence for these two agencies meant that the Federal Reserve would not be far behind, the majority declared that the Fed
is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.
That may well be, but the example of the early bank should not save the Federal Reserve from the demands of the separation of powers. The first and second bank were wholly different creatures from today’s Fed. The legislation establishing the first Bank of the United States, the one signed by George Washington and over which Hamilton and Jefferson had fought, expired just before the War of 1812. Part of the responsibility for the Madison administration’s setbacks fell on its difficulties in financing the war without a national bank. Lesson learned, Congress established the Second Bank of the United States in 1816. Madison, who had argued against the constitutionality of the first Bank while a congressman, signed the legislation as president.
In contrast to today’s Fed, the Second Bank was a private corporation chartered by the federal government, which held one-fifth of its stock and appointed one-fifth of the directors. By law, only the Second Bank could keep and transfer government funds, help in the collection of taxes, lend money to the government, and issue federal bank notes. Its $13 million in notes, which served as a form of paper currency, made up almost 40 percent of all notes in circulation, and its $35 million in capital was more than double the annual federal budget. It made 20 percent of the nation’s loans and held more than one-quarter of its deposits. States could also charter banks, whose notes often came into the possession of the Second Bank during the course of normal business. Because it could call in those notes for repayment at any time, the Second Bank effectively dictated the credit reserves of the state banks, and thus of the entire national banking system. As with the Federal Reserve Bank today, the Second Bank’s control over the supply of money allowed it to influence, if not control, the nation’s lending activities, interest rates, and economic growth. Its stock was held by 4,000 shareholders, 500 of them foreigners, who enjoyed profits of 8 to 10 percent per year.
Andrew Jackson destroyed the Second Bank because of the great power held by a private corporation. He viewed it as an unconstitutional institution that benefited a small financial elite, and he vetoed its rechartering on the ground, in part, that the president had the right to hold a different view of the Constitution than the Supreme Court (which had upheld the bank in the famous McCullough v. Maryland case), Congress (which had passed the laws establishing the banks), and even past presidents (Washington and Madison had signed those laws).
Today’s Fed, by contrast, is no corporation. Instead, it is a regulatory agency charged with carrying out congressionally mandated responsibilities, including both bank supervision and monetary policy. It moves interest rates by buying and selling treasuries on behalf of the federal government; its goals of achieving “maximum employment, stable prices, and moderate long-term interest rates” is even set by congressional statute. Congress has also given the Fed the power to regulate the financial markets and the banking industry, and the important authority to supervise “systematically important financial institutions.” These represent core executive functions of enforcing the law toward private individuals and institutions. There is no intellectually principled way for the Fed to escape the rule of Seila Law.
A Supreme Court rejection of an independent Fed could destabilize the economy as financial markets worry about political control over interest rates and the money supply. But subjecting the Fed to presidential control would restore political accountability for public policy choices to the elected branches of government. It would bring the operation of today’s executive branch closer to the constitutional text and the original understanding of the executive power. Respecting the constitutional order should prevail over the supposed efficiencies of the modern administrative state.
John Yoo is a distinguished visiting professor at the School of Civic Leadership and a senior research fellow at the Civitas Institute at the University of Texas at Austin, the Heller Professor of Law at the University of California, Berkeley, and a nonresident senior fellow at the American Enterprise Institute. Robert J. Delahunty is a fellow at the Claremont Institute’s Center for the American Way of Life.