(This is a complimentary research note from our TMT and Legal Policy analyst Paul Glenchur. If you are an institutional investor interested in accessing Paul's research email sales@hedgeye.com.)
The markets were rattled a few weeks ago when President Trump suggested he wanted to dismiss Federal Reserve Chairman Jerome Powell, escalating concerns that White House political pressure could compromise the independence of Fed monetary policy decisions. Although the President later said he had no intention of firing the Chairman, the issue of Fed independence is far from settled.
Tomorrow (May 16), a federal appellate court will hear arguments in a case focused on the President's constitutional power to dismiss the leadership of "independent" agencies. The court's ruling, although not directly involving the Fed, could intensify concerns about its future independence.
President Trump has dismissed members of various federal agencies, including the FTC, the National Labor Relations Board, the Merit Systems Protection Board, and the Consumer Product Safety Commission. The dismissals are purely discretionary, violating the statutory tenure protections that require proof of malfeasance, misconduct or other for-cause justifications for removing these officials. President Trump's Justice Department rejects the statutory tenure protections as unconstitutional encroachments on the President's Article II responsibility to "take Care that the Laws be faithfully executed." Under this theory, all executive functions are subject to the President's control, and statutory tenure protections illegally empower bureaucrats to supplant the President's constitutional accountability for executive actions and decisions.
Progress of the Case: The dismissed members of the NLRB (Gwynne Wilcox) and the MSPB (Cathy Harris) challenged the President's action and the case will be argued tomorrow. Although federal district courts ordered the reinstatement of the officials, the Supreme Court, after some back-and-forth appellate court actions, put a freeze on the district court rulings as the underlying constitutional question works through the appellate court process with ultimate review likely in the U.S. Supreme Court. After the U.S. Court of Appeals for the DC Circuit rules in this case (with possible rehearing by the full court), the matter will be headed to the Supreme Court.
The case has been expedited. The affected agencies now operate in legal limbo. If the FTC votes on a matter, for example, the action could be challenged as the order of an illegally-constituted commission because the process, according to existing statutory requirements, required the engagement of the two fired Democrats.
Executive Order Application to the Fed: The President issued an Executive Order in February implementing his comprehensive view of executive power. As the Order states, "it shall be the policy of the executive branch to ensure Presidential supervision and control of the entire executive branch." The Order mandates agency accountability to the White House through various mechanisms and reporting requirements.
Recognizing implications for the Fed, the Executive Order excludes Fed monetary policy from its coverage, but applies the Order's mandates to the Fed's supervision and regulation of financial institutions. The Order's exclusion of monetary policy, however, is a matter of Presidential discretion, not the recognition of a legal limitation. Moreover, despite a carve-out for monetary policy, there would be inevitable concerns that the President could attempt to influence monetary policy by citing disagreements with Fed bank regulation to indirectly pressure the Fed Chair.
Tomorrow's appellate court hearing directly focuses on members of the NLRB and the MSPB, not the Federal Reserve or other agencies. The precedent set by the upcoming decision, however, would likely affect all other multimember federal agencies.
Trump DOJ's Constitutional View: Nearly a century ago, in Humphrey's Executor v. United States, the Supreme Court upheld tenure protections for a member of the FTC, noting the agency engaged primarily in quasi-judicial or quasi-legislative functions. Trump's Justice Department argues that today's independent agencies exercise powers well beyond the more limited authority of the FTC in 1935. The agencies promulgate regulations and bring administrative and judicial actions to enforce statutory and regulatory obligations. These are quintessentially executive responsibilities, the Administration contends, and insulating agency heads from total Presidential control through statutory tenure protections violates Article II of the Constitution.
We would expect plenty of post-argument and eventually post-decision chatter about the litigation's implications for independent Fed monetary policy. Inevitably, the Supreme Court must resolve this. Although arguments for the current Supreme Court term ended in April, the Court can hold special argument sessions as it will do today in a case involving injunctions against President Trump's birthright citizenship executive order. The timeline for Supreme Court review of the independent agency issues may be clarified as the appellate case nears completion.
We're Giving Trump the Edge in Tomorrow's Case: Oral arguments could provide useful insights on the panel's disposition. Going into arguments, however, we give the edge to President Trump because two of his appointees to the DC Circuit will be sitting along with a Biden appointee. Based on previous court decisions -- in response to the Trump Administration's opposition to interim reinstatement of the NLRB and MSPB officials -- we suspect the Trump-appointed judges will probably back the President's view of comprehensive "unitary executive" authority. There may be discussion in the upcoming opinion about unique circumstances that could limit application of the ruling to the Federal Reserve, but the appellate court cannot issue any type of binding guidance that governs the Fed in a case involving the NLRB and MSPB.
Supreme Court is Sensitive to Fed Implications: When this case finally gets to the Supreme Court, we expect the Court will consider its implications for the independence of the Fed. In a case decided last year involving funding for the Consumer Financial Protection Bureau, Justice Samuel Alito, in a dissenting opinion, suggested the Fed's historic pedigree could be relevant to a possible carve-out if and when the Court makes a definitive ruling on the scope of Presidential executive branch control. Clearly, the Justices appreciate the economic and market significance of political branch control over the Fed. At this point, however, there simply is not enough discussion in any prior Court opinions to predict how the Court would limit its application to the Fed if it ultimately embraces the Trump Administration's basic constitutional theory.
Tomorrow's case should be decided fairly quickly. We suspect the full active membership of the DC Circuit would prefer to leave the status quo in place and preserve the independence of agencies under the Humphrey's Executor precedent. This is just speculation, but a decision against the NLRB and MSPB officials, reversing the lower court reinstatements of them, could trigger a full-court en banc rehearing, adding time before Supreme Court review. An appellate court decision favoring the officials probably tracks a direct path to the High Court.
Again, the timing of ultimate Supreme Court consideration and decision in this matter is uncertain, but the magnitude of the case and its impact on regulatory stability and the operations of long-established bipartisan expert agencies suggest the Justices will move expeditiously when the matter is squarely presented to them.
