Fed's Michael Barr to resign early to avoid legal fight with Trump

Barr's early exit now clears the way for Trump, who will be sworn in on Jan. 20, to appoint an entirely fresh slate of banking regulators and begin work on a more industry-friendly agenda

Michael Barr, the Federal Reserve's top regulatory cop, said he will step down on Feb. 28, in a surprise move that will avert a potentially messy legal fight with President-elect Donald Trump who is now free to replace him with an official of his choosing. 

Barr said he was stepping down as the central bank's vice chair for supervision over a year before his term was set to expire in July 2026, but planned to keep his seat on the Fed's Board of Governors. 

Barr told Congress in November that he intended to serve out his term, but since then has concluded that doing so could risk a potentially harmful dispute with the incoming Trump administration, which the Washington Post reported in October has considered demoting Barr from his regulatory post. 

 

"The risk of that being a serious distraction to the Federal Reserve and its ability to serve the people was very high," he told Reuters on Monday. "I didn’t think that risk was worth it." Reuters had previously reported that Barr, a Democrat nominated by President Joe Biden, had sought legal advice from an outside law firm to explore his options should Trump try to remove him. 

Barr confirmed that Reuters report on Monday, adding that both his own lawyers and Fed general counsel agree that he could ultimately win the legal fight, but that it would be "deeply unpleasant." 

His early exit now clears the way for Trump, who will be sworn in on Jan. 20, to appoint an entirely fresh slate of banking regulators and begin work on a more industry-friendly agenda, although Barr's decision to remain as a governor limits Trump's immediate options. Trump has not offered many details on bank regulation specifically, but has made it a top priority to trim rules as he seeks to boost economic growth. 

There are no open seats on the Fed's seven-member board until 2026, meaning Trump would either need to select a new regulatory chief from the current slate of governors, or move one of those officials to a separate post elsewhere to free up a spot. 

The central bank said in a statement it would take up no major rulemaking until a successor to the regulatory role is confirmed. 

Fed Governor Michelle Bowman, a vocal critic of Barr's efforts to impose tougher rules on the banking sector, is widely seen by lobbyists and analysts as the top candidate to replace him. Christopher Waller, another Fed governor nominated by Trump in his first term, is viewed as another potential candidate by industry officials. 

"Barr's resignation is somewhat unexpected and a positive for banks," Brian Gardner, chief Washington policy strategist for Stifel, wrote in a note, adding it would allow Fed officials to ease up immediately on supervision and M&A approvals, and could allow the central bank to shelve contentious bank capital hikes. 

"While much of the Trump trade appears to be already priced into bank stocks, we think the probability of an accelerated timetable is still a positive for the sector." Barr pushed a range of stricter rules on the nation's biggest banks, including the so-called Basel III Endgame capital hikes. 

But the banking industry intensely lobbied against his efforts and threatened to sue over the draft rule, causing the measure to become mired in a disagreement among regulatory officials on how to proceed. With Barr no longer in the post, that rule could be shelved entirely. 

Aside from the Washington Post story, other media reports in recent months have suggested Trump's advisers were looking for ways to increase the incoming White House's sway over the Fed, alarming officials and investors who argue that the central bank's independence is necessary for it to be able to properly set monetary policy. 

A spokesperson for Trump's transition team did not immediately respond to a request for comment. 

Fed Chair Jerome Powell, who was appointed to his role as central bank chief by Trump only to be subsequently criticized for his decisions on interest rates, was seen as a target of the incoming president. But Powell said after the Nov. 5 presidential election that Trump would not have the authority to remove him. Trump subsequently said he does not intend to remove Powell. 

The law establishing the Fed says the president is allowed to fire Fed governors only for cause, but it is silent on whether Trump would have the power to demote Barr from his role as vice chair for supervision. Powell has previously said demoting Fed officials is not permitted under the law. 

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