By Pete Schroeder
WASHINGTON (Reuters) – Michael Barr, the Federal Reserve’s top regulatory cop, said he would step down on Feb. 28, in a surprise move to avert a potentially messy legal battle with President-elect Donald Trump who can now replace him with an official of his choosing.
Barr said he is stepping down as vice chairman of the central bank for oversight more than a year before his term expires in July 2026, but plans 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 has since concluded that doing so could risk a potentially damaging dispute with the incoming Trump administration, which the Washington Post reported in October was considering demoting Barr from his regulatory role.
“The risk of this seriously disrupting 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 previously reported that Barr, a Democrat nominated by President Joe Biden, had sought legal advice from an outside law firm to explore his options if Trump tried to impeach him. Barr confirmed the Reuters report on Monday, adding that both his lawyers and the Fed’s general counsel agreed that he could ultimately win the legal battle, but that it would be “deeply embarrassing.”
His early departure now clears the way for Trump, who will be sworn in on Jan. 20, to name a whole new cast of banking regulators and begin work on a more industry-friendly agenda, although Barr’s decision to remain governor limits Trump’s immediate options. Trump didn’t offer many details on bank regulation specifically, but he made cutting rules a top priority as he seeks to spur economic growth.
There are no vacancies on the Fed’s seven-member board until 2026, meaning Trump would have to either pick a new regulatory chief from the current list of governors, or move one of those officials to a separate seat elsewhere to free up the seat.
The central bank said in a statement that it will not undertake any significant 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 seen by lobbyists and analysts as a leading candidate to replace him. Christopher Waller, another Fed governor nominated by Trump in his first term, is seen by industry officials as another potential candidate.
“Barr’s resignation is somewhat unexpected and positive for banks,” Brian Gardner, chief Washington policy strategist for Stifel, wrote in a note, adding that it would allow Fed officials to immediately ease oversight and approvals for mergers and acquisitions, and could allow the central bank postpone the disputed capital increases of banks.
“While much of the Trump trade appears to have already been factored into bank stocks, we think the likelihood of an accelerated timetable is still positive for the sector.”
Barr introduced a series of tougher rules for the nation’s biggest banks, including the so-called Basel III Endgame capital increases. But the banking industry lobbied hard against his efforts and threatened to sue over the draft rules, leaving the measure mired in disagreements among regulatory officials over how to proceed. With Barr no longer in that position, that rule could be dropped entirely.
In addition to the Washington Post story, other media reports in recent months have suggested that Trump advisers have been looking for ways to increase the incoming White House’s influence over the Fed, alarming officials and investors who argue that the central bank’s independence is necessary to properly set monetary policy.
A spokesman for Trump’s transition team did not immediately respond to a request for comment.
Fed Chairman Jerome Powell, who Trump nominated to head the central bank only to be criticized for his interest rate decisions, was seen as a target for the incoming president. But Powell said after the Nov. 5 presidential election that Trump would not have the power to remove him. Trump said afterward that he did not intend to fire Powell.
The Fed’s founding law says the president is only allowed to fire Fed governors for cause, but it is silent on whether Trump would have the authority to demote Barr from his role as vice chairman for oversight. Powell previously said demoting Fed officials was not allowed under the law.
