Graeme Sloan/Sipa USA via AP Images
The Board of Governors of the Federal Reserve has a 4-3 Democratic majority. But in reality, it has a 4-3 Wall Street majority, and that’s on a good day.
As a result, financial regulation keeps being gutted, while banks keep coming under new stresses and taking on new risks, compounded by products like crypto. All this has happened before Trump even takes office.
This regulatory default has two prime causes. The first is the capture of much of the Democratic Party by Wall Street. The second is the near-total control of the Fed policy process by Powell.
Chair Powell has come in for criticism for his overly restrictive monetary policy, based on a misunderstanding of the structural and supply sources of much of the 2021–2023 inflation. Powell’s overly tight money needlessly slowed down the recovery. But his domination of regulatory policy, which has been less remarked upon, is far more serious. Among other achievements, Powell made sure that the Fed would gut regulations on capital adequacy, executive compensation, climate risks to banks, bank long-term debt, and other key issues.
“By killing or gutting so many rules, Powell is acting as the de facto lobbyist for Wall Street’s biggest, most dangerous banks,” says Dennis Kelleher, who heads the group Better Markets. “If he was literally JPMorgan Chase’s chief lobbyist, what would Powell be doing differently?”
The difference, of course, would be the inconvenience of having to just lobby the Fed from the outside. It’s much more effective to have a key ally running the Fed.
Powell is an extreme case of the norm that the Fed operates by consensus. Powell has used his considerable skills to make sure that the chair defines the consensus and that other governors defer to him, working both an inside game with staff and other governors, and the outside game with Wall Street executives and an overly deferential financial press, on a common strategy.
A revealing player in this drama is Michael Barr, who resigned last week as Fed vice chair for supervision. Barr spent much of the past two years trying to get the Fed to enact a long-delayed rule on bank capital adequacy. The rule had been approved by other financial regulatory agencies and other major nations as part of a protracted joint effort to harmonize and strengthen bank capital standards, known as Basel III (don’t ask).
Powell is an extreme case of the norm that the Fed operates by consensus.
Capital standards are crucial to avoiding the syndrome of crash followed by government bailout. If banks must hold more capital against possible losses, they have more of a cushion in the event of a speculative loss. And they are less able to engage in risky debt-financed speculation in the first place.
The flip side is that with less capital, banks are more free to use higher leverage to make ever riskier and ever more lucrative plays, which generate the highest bonuses (which is why Powell killing the rule putting limits on high-risk executive compensation makes so much sense). So Wall Street’s prime goal has been to kill the rule.
In trying to get the Fed to approve the capital standards, Barr ran into the stone wall of Jerome Powell. But Barr was far too deferential to the Fed norm of policymaking by chair-dominated consensus.
Barr might have gone public with high-profile speeches and op-eds demolishing Wall Street’s bogus arguments against the rule. These included the claims that the rule would be bad for minority lending, or mortgage lending, or bank provision of loans in general. He might have publicly challenged Chair Powell, and leaned harder on the Fed Board’s other Democrats.
But Barr did none of this. Instead, he just put out the draft rule, and it became the object of a relentless lobbying campaign, abetted by Powell.
Unsurprisingly, after a year of the rule being bashed and not defended by Barr, he unilaterally surrendered in a widely covered speech at Brookings last September. He proposed drastically watering down the proposed capital adequacy rule. This clumsy attempt at appeasement only whetted Wall Street’s and Powell’s appetite to gut the rule even further.
Then, Barr announced that he would resign as vice chair by February 28, or sooner if Trump nominates a successor who is confirmed by the Senate. Barr will remain on the Fed board.
What of the other Democrats on the Board of Governors? The other three are Vice Chair Philip Jefferson, Lisa Cook, and Adriana Kugler. Of these, Cook and Kugler are relatively progressive, but Cook’s expertise is not financial regulation. A former economics professor, she specialized in African economic development. She is the first African American to serve on the Fed Board.
Jefferson, also a former academic, was a staff economist at the Fed at one point in his career. The Fed staff is notoriously and reliably friendly to Wall Street. Where Cook was confirmed by a 50-49 party-line vote, Jefferson posed no threat to the big banks and was overwhelmingly confirmed, 91-7.
In addition to these two Biden appointees, both African American, Biden appointed a third person of color in Adriana Kugler, a labor economist who previously served as U.S. director of the World Bank. Biden appointed Kugler not because the White House made further diversity a priority, but because now-disgraced former Sen. Bob Menendez reportedly put a hold on all Fed nominations until the president appointed a Hispanic member. The White House came up with Kugler, who is Jewish and Colombian American, and Menendez supported her nomination.
It was Biden, in one of his greatest mistakes, who reappointed Powell in 2021. Powell, who had first been appointed by Trump, had kept interest rates low before and during the pandemic. Biden hoped he would continue to do so. The ink was barely dry on Powell’s appointment when he began hiking rates.
MICHAEL BARR HAS BEEN DEPICTED as the progressive outlier on the Fed, forced out by the incipient coming of Trump. That is far too kind on both counts. He’s not much of a progressive and he wasn’t forced out.
In the Obama administration, where he served as assistant Treasury secretary for financial institutions, Barr was a protégé of Tim Geithner, the ultimate Wall Street Democrat. As Treasury secretary, Geithner’s priority was bailing out the big banks rather than cleaning them out.
On several key policy issues, Barr’s approach was light-touch regulation. He opposed a strong version of the so-called Volcker Rule, which limits banks’ proprietary trading. The current weak rule is riddled with loopholes, and banks have found ways to profit from activities that are nominally excluded. The biggest banks emerged from the crisis more powerful and more concentrated than ever.
In the Biden transition, Barr served as director of the transition for the Treasury. The job he wanted for himself was Treasury undersecretary for domestic finance. But the incoming Treasury secretary, Janet Yellen, made sure that this key post went to her close ally and former Fed colleague Nellie Liang. After it became clear that the Senate would not confirm a strong progressive, such as former Fed governor Sarah Bloom Raskin, as vice chair for supervision, Barr was available for the job.
The fact is that the Fed is already deeply politicized, but all of the quiet power is on one side.
When Biden appointed Barr as the Fed’s vice chair for supervision in July 2022, he was confirmed by the Senate, 66-28, after signaling openness to financial “innovation,” code for fintech and crypto. This was not a man who was going to overthrow the Wall Street–dominated regime at the Fed.
The Wall Street Journal greeted Barr’s resignation with glee and scorn, inventively referring to the centrist Barr as an “[Elizabeth] Warren protege.” If only! Barr’s views are far from Warren’s. Warren repeatedly tangled with Geithner and Barr when she was chair of the congressional oversight committee for the bank bailout and he was at the Geithner Treasury.
But as the French say, “In the kingdom of the blind, the one-eyed man is king.” So by default, Barr became the Fed’s chief regulator. It was a thankless task.
Just one sitting Fed governor has had the nerve to challenge Powell in recent years. That was Lael Brainard, who publicly dissented 13 times during her Fed tenure from 2014 to 2023 against Powell-led rules weakening bank regulation. These included liquidity risk, margin requirements for swaps, restrictions on proprietary trading, rules for U.S. subsidiaries of foreign banks, and others. Despite this dissent inside the Fed, the Earth did not fall off its axis and the markets didn’t crash.
Barr might have learned from Brainard. Far from her career being ruined for these acts of lèse-majesté, Brainard went on to the top White House job on the economy, as chair of the National Economic Council.
But Powell played Barr like a violin. Barr decided to call it quits after Powell persuaded him that if Barr stayed, that could mess up the usual tidy consensus at the Fed and weaken Powell’s ability to remain independent from Trump. So Barr’s comments on his resignation included these Delphic words: “The risk of a dispute over [my] position could be a distraction from our mission.” This was code for weakening the Fed’s independence.
But Powell’s argument was malarkey. If Trump tries to fire Powell, who has a fixed term under the law, Powell has made clear that he will fight and probably win. Barr, whose term as vice chair for supervision ran until 2026, could have done the same.
The fact is that the Fed is already deeply politicized, but all of the quiet power is on one side. Bringing some of the disputes out into the open would be an important and constructive disruption.
Indeed, it now appears that a small bloc of Trump loyalists on the Fed is already forming, and this has nothing to do with Barr’s actions. Last Wednesday, speaking at an OECD conference in Paris, Fed governor Christopher Waller, a Trump appointee, said that even if tariffs are enacted, they will not affect inflation and that he supports further cuts in interest rates. “My bottom-line message is that I believe more cuts will be appropriate,” Waller said.
The remark was pure sucking up to Trump, contradicting Powell’s recent efforts to throw cold water on expectations of further rate cuts. There was little public dissent from Powell’s views while Biden was president.
So Barr’s resignation, far from calming the waters, has handed Trump a double gift. If the vice chair for supervision position is vacant, no regulations are going to be issued. Trump could just keep it vacant and effectively kill further rulemaking entirely. Or he could name someone like Fed governor Michelle Bowman, a Wall Street ally who has been angling for the job.
The broad stock market has fallen about 10 percent from its November peak. Trump’s main political goal is to shore up the market. He is hoping that big tax cuts and weakened regulation will do this. But he can’t really levitate the market without the cooperation of the Fed.
So Barr’s resignation has actually strengthened Trump’s hand against Powell, on both regulation and monetary policy. By resigning as the Fed’s lead regulator early, Barr failed to serve the public interest and he didn’t even serve Powell.
