Trump Power Over Fed Tested as Supreme Court Hears Cook Case (2)

The US Supreme Court so far has helped shield the Federal Reserve from President Donald Trump’s efforts to seize control. An argument Wednesday will test just how committed the court is to the Fed’s independence.

The justices will weigh whether to let Trump fire Fed Governor Lisa Cook over mortgage-fraud allegations that she denies. The session, which started shortly after 10 a.m., will coincide with a Justice Department criminal investigation into Fed Chair Jerome Powell, a probe that has sparked bipartisan backlash.

The US Supreme Court so far has helped shield the Federal Reserve from President Donald Trump’s efforts to seize control.

Photographer: Al Drago/Bloomberg

The Cook case formally concerns whether Trump can oust her temporarily while her challenge continues. But the legal issues promise to have a broader effect, potentially opening a path for Trump to remove Powell and other governors who haven’t voted to lower interest rates as quickly as the president has demanded. Powell, a lawyer by training, is planning on attending the argument.

“This is a case that’s about much more than Cook,” said Lev Menand, a Columbia University law professor who studies the Fed and filed a brief opposing the firing. “It’s about whether President Trump will be able to take over the Federal Reserve Board in the coming months.”

The stakes for the US and world economies are massive, as underscored by a bipartisan group of former Treasury secretaries, Federal Reserve chairs and other experts. They filed a brief saying a decision for Trump would undermine public confidence in the Fed and jeopardize its ability to effectively set monetary policy.

Central banks that can set interest rates free from political influence, as is the case in most developed economies, achieve lower inflation and better economic outcomes in the long term, research has shown. Trump’s threats to remove Fed officials, and his near constant pressure on the central bank to lower interest rates aggressively, have increased concern that the Fed’s independence is at risk of eroding.

The president’s search for a new Fed chair has been the subject of fervent speculation as he seeks a candidate who will pursue the steep interest-rate cuts he wants and also commands credibility with Wall Street and his political base.

Trump won’t announce his pick while he is in Davos this week for the World Economic Forum, according to a senior White House official, who discussed the timing of the president’s plans on condition of anonymity. The official said Trump still has not decided on his nominee.

Read More: Can Trump Fire Lisa Cook? What the Supreme Court Will Consider

Trump Allegations

Trump says it’s Cook who is harming the Fed’s credibility. The administration accuses Cook of fraudulently listing homes in Michigan and Georgia as a “primary residence” to secure more favorable terms on loans when she obtained mortgages in 2021.

Federal Reserve Governor Lisa Cook

Photographer: Al Drago/Bloomberg

Trump legitimately concluded that “the American people should not have their interest rates determined by someone who made misrepresentations material to her mortgage rates that appear to have been grossly negligent at best and fraudulent at worst,” US Solicitor General D. John Sauer said in court papers.

The veracity of those allegations isn’t before the court, though Cook has said they are baseless claims that rely on “cherry-picked, incomplete snippets” of documents. “There is no evidence that Governor Cook made false representations or had the required specific intent to defraud,” her lawyers said in a November letter. She has not been charged with any wrongdoing.

The Supreme Court seemed to shield Fed governors in May, when it exempted the central bank from a ruling that let Trump oust top officials at two other independent agencies, including the National Labor Relations Board. Though temporary, the decision nullified job protections Congress had created for those positions, with the court majority saying the president’s constitutional authority means he generally can fire top officials at executive-branch agencies for any reason.

The Federal Reserve Act contains a similar provision, barring presidential removal of governors except “for cause.” But the court went out of its way to say the NLRB decision didn’t affect the Fed, calling it a “uniquely structured, quasi-private entity.”

Less than three months later, the administration turned its sights to Cook, saying it had the required “cause” to oust her because of the mortgage-fraud accusation. Cook, who overcame fierce Republican opposition to win Senate confirmation, has voted in line with Powell since first joining the board in 2022. She supported the Fed’s decision to hold rates steady for much of last year despite Trump’s repeated calls for drastic cuts.

A television station broadcasts the Federal Reserve’s decision to leave rates unchanged on the floor of the New York Stock Exchange in June. Cook supported the Fed’s decision to hold rates steady for much of last year despite Trump’s repeated calls for drastic cuts.

Photographer: Michael Nagle/Bloomberg

Cook sued, and two lower courts blocked Trump from removing her while the legal fight went forward. In September Trump turned to the Supreme Court, whose conservative supermajority has repeatedly backed him in ouster cases over the past year. Trump sought clearance to fire Cook immediately.

The high court instead took the unusual step of saying it would hear arguments in January – suggesting it was in no hurry to accommodate Trump. The justices could wait until late June to rule.

Powell Stakes

The stakes have only increased after the Justice Department issued subpoenas as part of the probe of Powell. The subpoenas were tied to Powell’s June congressional testimony on the cost of renovations of the Fed’s headquarters. Powell responded with an extraordinary video in which he said the probe was designed to pressure the Fed into lowering interest rates.

US President Donald Trump and Federal Reserve chair Jerome Powell at the Federal Reserve in Washington in July.

Photographer: Andrew Caballero-Reynolds/AFP/Getty Images

The subpoenas could “spook the justices,” Michael Dorf, a Cornell Law School professor who signed a brief backing Cook in the case, said in a social media post. It “simply highlights the image of the administration as wanting to use the ability to fire for cause as a pretext to fire for policy,” he added in an interview.

Cook says Trump’s bid to fire her is improper for multiple reasons. She argues that, even if the allegations were true, they wouldn’t amount to “cause” for firing because they don’t concern her job performance or eligibility to hold the position.

She also contends that the Constitution and the Federal Reserve Act give her important procedural rights, including an opportunity to contest the allegations before she loses her job.

Because the case is still on the court’s emergency docket — with Trump seeking an order letting him remove Cook only for now — the justices don’t have to definitively decide those questions. They instead could factor in the consequences, including the economic impact and the broader implications for the Fed and the Federal Open Market Committee’s rate-setting work.

If they allow the Cook firing, “then basically every governor is an employee at will,” said Derek Tang, an economist at LH/Meyer Monetary Policy Analytics. “And so whenever there’s a new president they can just fire everyone and change all seven governors and by implication they can change the whole FOMC.”

Supporters of Trump’s position say those concerns have to yield to the Constitution.

“The Constitution does not set up a fourth independent, unaccountable branch of government to handle money and banking,” said Jacob Huebert, a lawyer with the New Civil Liberties Alliance, a group that challenges what it sees as administrative overreach. “Some people might think it should have, but the fact is that it didn’t.”

(Updates with start of oral arguments at the court.)

--With assistance from Hadriana Lowenkron.

To contact the reporters on this story:
Greg Stohr in Washington at gstohr@bloomberg.net;
Amara Omeokwe in Washington at aomeokwe@bloomberg.net;
Catarina Saraiva in Houston at asaraiva5@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Wasserman at ewasserman2@bloomberg.net

Magan Crane

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