With Barr’s exit from the regulatory role, Trump has the first chance to strengthen the Fed

By Ann Saphir and Michael S. Derby

(Reuters) – Federal Reserve Board Vice Chairman Michael Barr’s decision on Monday to step down early from his regulatory oversight role sets up an early test of how Donald Trump will try to shape the central bank the United States during his second term as president.

Barr said Monday that he plans to step down from his leadership role on the Fed’s Board of Governors on February 28, but will remain as governor, with a term that runs until January 2032.

The move leaves no immediate opening for Trump to shape interest rate setting by appointing someone new to the Fed’s board. But it gives him the option to quickly elevate a current board member to run the Fed’s banking supervision function in a way more in line with his lighter-touch preferences, and avoids what could be a disruptive legal outcry. about the political control of the role. .

Barr is only the second person to serve as the Fed’s vice chairman for supervision, a position created after the 2007-2009 financial crisis and the frenzy of regulatory reform that followed.

“Regardless of whether or not it was a kowtow or for other reasons, this will probably set a precedent for how political the vice president’s oversight role is,” said Steven Kelly, associate director of research at the Yale School of Management. . Financial Stability Program. “Barr’s resignation likely means the role will continue to shift with presidential administrations, much like the leadership roles of other banking agencies.”

Fed Governor Michelle Bowman, who has repeatedly voiced her opposition to Barr’s tougher regulatory approach, is a likely choice for his successor under the incoming Trump administration, analysts said.

At the same time, Barr’s decision to remain a Fed governor, which will see him continue to vote on interest rate decisions, may help to strengthen the political independence of the central bank in relation to the monetary policy, some observers said. Central bankers and economists generally see insulation from political influence on interest rate decisions to be critical to inflation control efforts.

“The hypothesis that the Fed (Powell) is more willing to work with Republicans on regulation and supervision, as a way to preserve the independence of monetary policy, could have legs,” wrote the LH Meyer analyst Derek Tang.

Fed Chairman Jerome Powell’s role as head of the central bank does not end until 2026.

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Graham Steele, an academic fellow at Stanford Law School and former assistant secretary at the Treasury Department in the Biden administration, worries that Barr’s move may create long-term problems for the central bank. Leaving the role of vice chairman now “sends the message that the Fed is not independent — both in the sense of an administrative agency and in the sense of a central bank.”

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