President Donald Trump could be close to taking over the Federal Reserve. On September 9, a federal district judge blocked Trump’s effort to remove Lisa Cook as a Federal Reserve governor; on Thursday, the administration petitioned the Supreme Court to allow the firing to go through. If the high court ends up siding with the administration, then Trump will have a clear path to filling the central bank with loyalists willing to vote the way he directs them to.
So far, most of the hand-wringing over this possibility has centered on Trump’s desire to dramatically cut interest rates, which could juice the economy and improve the GOP’s political prospects in the short term, but make inflation worse and destroy the Fed’s credibility in the long term. But the Fed has far more power than just setting rates; in fact, setting rates is the least of what it can do. The central bank determines the supply of money flowing through the economy, decides which institutions can have access to the financial system, and can print and spend money at will. If Trump takes control of the Fed, he will have attained extraordinary power to reward his friends and destroy his enemies.
The Constitution makes clear that Congress, not the president, holds the power to authorize new government spending. But a major exception to this rule exists. In 1932, Congress gave the Federal Reserve the power to lend money to “any individual, partnership, or corporation” during “unusual or exigent circumstances.” The Fed used the emergency-lending provision to make a few modest loans during the Great Depression. The power then lay dormant until the 2008 financial crisis, when the central bank issued hundreds of billions of dollars in loans in an effort to rescue major financial institutions on the brink of collapse. During the height of the coronavirus pandemic, the Fed went even further, offering trillions of dollars in loans not just to big banks but to corporations, small businesses, nonprofits, and even city governments.
Several legal experts told me that even this expansive use of the Fed’s lending authority was relatively restrained compared with what the central bank could do. Federal law imposes virtually no limits on what kind of institutions the Fed can lend to, how much money it can lend, or whether the loans ever need to be paid back. Whether any party would even have standing to sue the Fed for abusing its lending authority is unclear. As part of the 2010 Dodd-Frank financial-reform act, Congress imposed a few restrictions, but these turned out to be vague and easily gamable. “There are really no limits to this power,” Aaron Klein, a senior fellow at the Brookings Institution and former Treasury official who helped draft the relevant provisions of Dodd-Frank, told me. “The Fed can basically lend however much it wants, to whoever it wants, whenever it wants.”
Perhaps Trump would instruct his Fed appointees to exercise that power with restraint, lending only as needed to guide the economy through truly perilous circumstances. But little would stop him from instead treating the bank’s lending power as a bottomless slush fund. He could direct money to favored industries, such as crypto, or even his own businesses. He could reward media outlets that give him favorable coverage, companies that donate to Republican campaigns, and even the budgets of local officials who promote his agenda. If Democrats in Congress shut down the government to limit funds for ICE, say, he could send hundreds of billions of dollars to private contractors to keep operations moving. “It’s an infinite money pit,” Lev Menand, a professor at Columbia Law School who previously worked for the Federal Reserve Bank of New York, told me. “There’s really nothing to stop the administration from lending trillions of dollars to the president’s priorities.”
Perhaps even more alarming, control of the Fed would give the president a powerful weapon for punishing his enemies. The Fed is the central node of the U.S. financial system. Every major bank in the country holds a master checking account at the Fed, which they depend on to make and receive payments, manage their reserves, and access credit. The central bank, in turn, operates as the country’s main financial regulator: It determines whether banks are in compliance with existing laws on financial risk management and illicit transactions, for example, and has various ways to enforce that compliance, ultimately backed by the threat of cutting off access to the financial system altogether.
The Fed has considerable discretion over how it uses this authority, giving it enormous power over not only the country’s banks but all of the individuals, businesses, and organizations that require any kind of financial services. The response to marijuana legalization by one regional Fed branch is an instructive example. When Colorado legalized recreational marijuana in 2012, the Kansas City Fed, which has regulatory jurisdiction over the state, declared that banks offering financial services to cannabis sellers were in violation of federal law, implying they could lose their master accounts at the Fed. As a result, the state’s banks largely refused to provide services to marijuana businesses, forcing them to choose between dealing in cash, banking illegally, or going out of business. Colorado tried to fix this by passing a law authorizing the creation of special “marijuana financial-services cooperatives,” to provide credit for the industry, but the Fed refused to allow the new institutions access to the federal financial system. When one of the newly formed credit unions sued, the courts sided with the central bank.
How might Trump use the power to “debank,” as it is sometimes called? Take the administration’s threats against prominent left-leaning donors and organizations such George Soros’s Open Society Foundations and the Ford Foundation following the murder of Charlie Kirk. Trump could designate them as a “domestic terrorist threat” and direct the Fed to cut off any bank that does business with them. “That kind of thing is basically what happened with cannabis,” Klein told me. “It isn’t hard to imagine the same powers being used to go after Trump’s enemies.”
The tools Trump has used so far to bend institutions to his will, such as withholding federal funding, are powerful, but they pale in comparison to the power of debanking. An organization subjected to such treatment would be unable to pay its employees, manage its endowment, or receive funding from government or private sources. An individual would be unable to receive direct deposits from their employer, get a mortgage from a bank, or pay their bills. “If you’re made a persona non grata by the Fed, that’s completely debilitating,” Menand told me. “It’s the financial equivalent of cutting someone off from the electricity grid.”
Several legal experts told me that, given the broad discretion the courts have given the Fed over both lending and financial regulation, the judiciary would be unlikely to stop Trump from taking full advantage of the central bank’s powers. In theory, the market itself could provide the necessary check: Reckless actions could cause investors to panic and tank the stock and bond markets, forcing the administration to back down. But control of the Fed would also give the administration plenty of tools to placate the markets with low interest rates and easy money. The only sure check on Trump’s power would be Congress stepping in to amend the Federal Reserve Act. But this would require an implausible two-thirds majority vote to overcome a presidential veto in both chambers.
And so the most likely way to prevent these scenarios from unfolding is for the Supreme Court to rule that the firing of Lisa Cook was illegal, preventing Trump from taking over the central bank in the first place. If it instead green-lights Trump’s efforts, the scale of what could ensue is difficult to predict. Most of the experts who have worked within the Fed or studied it closely have never contemplated what could happen if an institution with so much unchecked power came under the control of one man. Perhaps it’s time to start imagining.
The post Control of the Fed Is About Much More Than Interest Rates appeared first on The Atlantic.
