Supreme Court Hears Case on Fed Independence: Presidential Power Under Scrutiny

The Federal Reserve’s ability to set interest rates without political interference — a cornerstone of US economic policy — is at stake this week in a pivotal Supreme Court case on presidential power. Oral arguments are set for 10 a.m. ET in the case of Fed Governor Lisa Cook, who is challenging President Donald Trump’s attempt to remove her from her role on the Fed’s powerful Board over unproven allegations of mortgage fraud. The president said Cook reporting two different homes as her primary residence — a practice that can yield better loan terms — was enough grounds to fire her. Cook, appointed by then-President Joe Biden and the first female Black governor to serve on the Board, has denied any wrongdoing. The Justice Department is investigating the accusations against Cook, first raised by Trump allies, but has not brought any charges against her. But the Federal Reserve Act of 1935 prevents the president from removing any member of the Fed’s Board other than “for cause,” which is generally interpreted to mean negligence or malfeasance in the role. If the court rules in favor of Trump, it could be a death knell for the Fed’s independence, raising fears of greater political influence over monetary policy and rattling global financial markets. It could lower the bar significantly for the White House to remove a Fed official who disagrees with the president on monetary policy. “The greatest, immediate threat to the Federal Reserve is the Supreme Court. Full stop,” former Philadelphia Fed President Patrick Harker told a central banking forum last week. “If they decide against [Cook], in my mind, independence is gone because every president will use this as an opportunity (to oust officials) forever.” A ruling in Trump’s favor would also give him a seat to fill on the Fed’s board, giving him another position to nominate this year. Fed Chair Jerome Powell, a co-defendant in Cook’s case, has chosen to attend the oral arguments along with the Fed’s head lawyer, in what experts describe as an unusual show of support. Treasury Secretary Scott Bessent on Tuesday described Powell’s attendance as “a real mistake.” Pressure on the Fed Cook’s case is emblematic of the Trump administration’s frustration with its lack of control over interest rates, a powerful economic tool that is controlled by the central bank. During his second term, Trump and his allies have levied intense pressure on the Fed to lower interest rates more rapidly. Trump has frequently disparaged Chair Powell, calling him “low IQ” and a “numbskull” for not bringing down rates to juice the economy after raising them to battle pandemic-era inflation. Powell revealed last week that he has been subpoenaed by the Justice Department over testimony he gave to Congress last year about the extent of the Fed’s self-funded $2.5 billion renovation to its headquarters in Washington, DC. In an extraordinary video rebutting the charges, Powell said the DOJ’s action was a pretext. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” Powell said in a statement late Sunday. Independence on the line The Fed’s structure is precisely what keeps monetary policy independent. Its influential rate-setting committee is composed of 12 officials, seven of whom are appointed by the president and serve on the central bank’s Board of Governors for staggered, 14-year terms. Those lengthy terms help insulate the Fed from short-term political pressures. If the court green-lights Cook’s ouster, it would set a precedent that Trump — and any future president — could take advantage of in order to reshape the Board and force lower interest rates, even when they are not warranted by economic reality. 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,” Kevin Gordon, head of macro research and strategy at Charles Schwab, wrote in an analyst note last week. Economists widely agree that a data-dependent Fed making tough decisions on interest rates has served Americans well, unlike the historical alternative: Back in the 1970s and early 1980s, former Fed Chair Arthur Burns, who had close ties with then-President Richard Nixon, notoriously didn’t lower rates with a national election right around the corner, even though there were tell-tale signs of brewing inflation. The Fed’s mistakes during that period exacerbated a painful period of high unemployment and high inflation. And yet another consequential change to the central bank is still to come: Trump is set to announce his pick for Fed chair within the next two weeks. Powell’s term leading the central bank expires on May 15 and he is serving a concurrent term on the Board that runs through 2028. He has not said if he plans to step down from the Fed altogether once his term as chair ends. It’s also unclear if Trump plans to keep Fed Governor Stephen Miran in his role, since the position was only temporary and expires later this month. The top contenders for Fed chair include National Economic Council Director Kevin Hassett; Kevin Warsh, a former Fed governor; Fed Governor Christopher Waller; and BlackRock Global Fixed Income Chief Investment Officer Rick Rieder.