Incoming President Donald Trump didn’t have to ask Federal Reserve Vice Chair Michael Barr to step down from his role as the central bank’s top regulator. As rumors mounted that Trump might try to demote Barr — and Washington insiders pondered if he’d survive as an independent bank regulator — the vice chair of supervision decided to spare everyone the trouble. “I strongly value the independence of the Fed,” Barr told Michael Stratford and Victoria Guida in an interview. He said he chose to resign as vice chair — while maintaining his seat as a Fed governor – because he “was worried that the risk of a dispute over the position would end up being a political distraction for the Federal Reserve and for me, and that that would end up detracting from our ability to serve our mission.” Barr’s decision may have kept the Fed out of a politically toxic battle with a president who wants more influence over its ability to set interest rates. But his choice to leave also means that thorny legal arguments about whether a president can fire or demote top Fed officials — including, potentially, the chair — will remain unresolved. It also ensures that questions about Trump’s ability to chip away at the Fed’s prized independence will continue as he assembles an economic team that’s repeatedly questioned the central bank’s structure and operations. Sullivan & Cromwell’s Senior Chair H. Rodgin Cohen told Victoria that a fight over Barr’s role would have run the risk of legally weakening the Fed's independence and spilling out into questions about the removability of the Fed chair. He called Barr an institutionalist, “in what I consider the best sense of the word.” “The Fed is obviously a very critical part of the economy, and if the president was really going to try to litigate to remove him, I think from the country’s perspective it was the best decision,” Cohen said. Barr still had more than a year left in his four-year term — he told lawmakers in November that he intended to see it through even if Trump or Elon Musk attempted to fire him — and his decision sets a clear precedent that “the incoming president gets to de facto ignore the term limit of the vice chair of supervision,” said Dennis Kelleher, the CEO of the financial watchdog group Better Markets. “It’s not clear to me the principled basis on which you could distinguish that from the chair.” “To not understand the importance of fighting here is to not understand anything,” he said. To be clear, Fed officials and their allies are adamant that the law would have been on Barr’s side had he chosen to stay and fight for his job. Fed Chair Jerome Powell in November said any attempt on the part of the new administration to fire or demote the central bank’s appointed leaders is “not permitted under the law.” Barr told POLITICO that both the Fed’s general counsel and his outside law firm, Arnold & Porter, concluded that the president didn’t have the power to remove him from his job. Scott Alvarez, the Fed’s former general counsel, said Barr would have had “the best argument” if he’d had to rely on the courts to preserve his vice chairmanship, noting that Republican and Democratic legal experts — including former Trump officials — have also said the central bank’s top policymakers legally protected. But “until a court makes a final decision, there’s going to be a lot of arguments among lawyers,” he said. “There’s a lot of politics in this one, and that’s something the court would strip away.” As your MM host reported on Monday: Certain legal experts believe that two recent Supreme Court cases — Collins v. Yellen and Seila v. CFPB — may have created a legal framework by which Trump could dismiss the Fed’s leadership. Industry sources have also pointed to a memo produced by the Justice Department’s Office of Legal Counsel in 2021 that identified a legal rationale for the president to fire a Social Security Administration commissioner at will. (It’s far from clear how receptive this Supreme Court might be to those arguments. Both Chief Justice John Roberts and Justice Brett Kavanaugh have written that the circumstances around the Fed are unique. Notably, Trump has repeatedly said he has no plans to fire Powell and never commented publicly on Barr.) Another confounding factor is that the Fed creates regulations — a responsibility that usually falls within the executive branch’s purview — in addition to its monetary policy functions. “Fed independence in making monetary policy is incredibly important and well understood and supported by research all over the world. It's not clear that Fed independence on bank regulation is in the same category,” David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy, told MM. Barr’s decision assured that the courts won’t render an opinion on those distinctions — at least not anytime soon. “It's a win for Trump,” Wessel said. “He gets Michael Barr out of the bank supervision role without having to do anything.” It’s TUESDAY — If you’ve got news tips, suggestions or feedback, hit me up at ssutton@politico.com.
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