This week, a crucial Supreme Court case regarding presidential power threatens the Federal Reserve’s capacity to establish interest rates free from political influence, a fundamental aspect of US economic policy. Oral arguments are scheduled for 10 a.m. regarding the case involving Fed Governor Lisa Cook, who is contesting President Donald Trump’s effort to dismiss her from her position on the Fed’s influential Board based on unsubstantiated claims of mortgage fraud. The president stated that Cook’s reporting of two distinct homes as her primary residence—a practice that can result in more favorable loan terms—constituted sufficient grounds for her termination. Cook, who was appointed by President Joe Biden and is the first female Black governor to serve on the Board, has denied any wrongdoing. The Justice Department is currently examining the allegations made against Cook, initially presented by Trump associates, yet has not filed any charges against her. However, the Federal Reserve Act of 1935 restricts the president’s ability to dismiss any member of the Fed’s Board except for “cause,” a term typically understood to encompass negligence or malfeasance in their duties. A ruling in favor of Trump by the court could signify a significant threat to the independence of the Federal Reserve, heightening concerns regarding increased political influence over monetary policy and unsettling global financial markets. The potential for the White House to more easily dismiss a Fed official who holds opposing views on monetary policy could be significantly heightened.
“The greatest, immediate threat to the Federal Reserve is the Supreme Court. Full stop,” remarked Patrick Harker. “Should they choose to dismiss [Cook], it signals the end of independence, as every subsequent president will seize this precedent to remove officials indefinitely.” A ruling in favor of Trump would additionally provide him with an opportunity to appoint a member to the Federal Reserve’s board, thereby granting him another nomination this year. Fed Chair Jerome Powell, a co-defendant in Cook’s case, has opted to attend the oral arguments alongside the Fed’s chief legal counsel, a move that experts characterize as an atypical display of backing. Treasury Secretary Scott Bessent on Tuesday characterized Powell’s attendance as “a real mistake.” Cook’s case illustrates the Trump administration’s dissatisfaction with its inability to influence interest rates, a significant economic instrument governed by the central bank. Throughout his second term, Trump and his associates have exerted significant pressure on the Federal Reserve to expedite the reduction of interest rates. Trump has often criticized Chair Powell, labeling him as “low IQ” and a “numbskull” for failing to lower rates to stimulate the economy after increasing them to combat inflation from the pandemic.
Last week, Powell disclosed that he has received a subpoena from the Justice Department regarding his testimony to Congress from the previous year concerning the scale of the Fed’s self-financed $2.5 billion renovation of its headquarters in Washington, DC. In a remarkable video response to the allegations, Powell asserted that the actions taken by the DOJ were merely a pretext. “The threat of criminal charges arises from the Federal Reserve’s decision to set interest rates according to our best assessment of public interest, rather than aligning with the preferences of the President,” Powell stated in a late Sunday announcement. The structure of the Federal Reserve is fundamentally what ensures the independence of monetary policy. The influential rate-setting committee consists of 12 officials, with seven appointed by the president who serve on the central bank’s Board of Governors for staggered, 14-year terms. The extended duration of these terms serves to shield the Federal Reserve from immediate political influences. If the court approves Cook’s removal, it would establish a precedent that Trump — and any subsequent president — could exploit to alter the Board and compel lower interest rates, regardless of whether such actions are justified by economic conditions.
The court’s ruling in the Cook case “will carry immense weight when it comes to any president’s ability to shape the structure of the Fed,” noted Kevin Gordon, head of macro research and strategy at Charles Schwab, in an analyst note last week. There is a consensus among economists that a data-driven Federal Reserve, making difficult choices regarding interest rates, has been beneficial for Americans. This stands in stark contrast to the past, particularly during the 1970s and early 1980s, when former Fed Chair Arthur Burns, closely aligned with President Richard Nixon, infamously refrained from lowering rates in the lead-up to a national election, despite clear indications of rising inflation. The Federal Reserve’s errors during that time intensified a challenging phase characterized by elevated unemployment and inflation rates. Another significant alteration to the central bank is imminent: Trump is expected to reveal his selection for Fed chair in the upcoming fortnight. Powell’s tenure at the helm of the central bank concludes on May 15, while he concurrently holds a position on the Board that extends until 2028. He has not indicated whether he intends to resign from the Fed entirely after his tenure as chair concludes. The future of Fed Governor Stephen Miran’s role remains uncertain, as his temporary appointment is set to conclude later this month. The leading candidates for the position of Fed chair are National Economic Council Director Kevin Hassett, former Fed governor Kevin Warsh, current Fed Governor Christopher Waller, and Rick Rieder, Chief Investment Officer of BlackRock Global Fixed Income.