Supreme Court Hears Trump's Bid to Fire Fed Official Lisa Cook

They suggested it was premature for the court to resolve the case when there were still factual disputes over those allegations, and they sounded skeptical that Ms. Cook had received sufficient notice of Mr. Trump’s accusations and an opportunity to respond. After about two hours of argument, a majority of the justices seemed likely to order additional proceedings, perhaps in the lower courts, meaning the Supreme Court’s ruling may not be the final word in the case. But if the justices agree to allow Ms. Cook to keep her job in the meantime, the result would be that the president’s effort to reshape the Fed would be frozen for now. The court’s conservative majority has repeatedly allowed Mr. Trump to oust leaders of other independent agencies as he moves to expand presidential power and seize control of the federal bureaucracy. But the justices have signaled that the Fed may be different and uniquely insulated from executive influence because of its structure and history. Key justices sharply questioned the Trump administration’s lawyer about the implications of the president’s position for the independence of the Fed and the economy. Justices Brett M. Kavanaugh and Amy Coney Barrett, who are often in the majority, noted that former Fed chairs and Treasury secretaries had warned against allowing the president to immediately remove Ms. Cook. Accepting the president’s view, Justice Kavanaugh said, would “weaken, if not shatter, the independence of the Federal Reserve,” he said, opening the door to future presidents trying to dismiss officials at the Fed “at will.” The justices agreed to hear Ms. Cook’s case on an expedited basis and are expected to rule in the coming weeks or months. The final outcome of the case could determine how much latitude presidents have to influence the direction of the powerful central bank, which Congress intentionally tried to insulate from political pressures. The case lands as the administration has dramatically escalated its attacks on the Fed, apparently aimed at remaking its board and lowering interest rates. The Justice Department this month opened a criminal investigation into whether Jerome H. Powell, the Fed chair, lied to Congress about cost overruns related to the Fed’s renovation of its headquarters. Mr. Powell, whose term as chair ends in May, forcefully pushed back on the threat of criminal charges, suggesting they were motivated by politics because the Fed set borrowing costs “based on our best assessment of what will serve the public, rather than following the preferences of the president.” The investigation prompted a backlash from Republicans, international policymakers, Wall Street and some Trump allies, who warned that the central bank’s independence and credibility was at risk. It also threatened to complicate Mr. Trump’s plans to name Mr. Powell’s replacement as chair — and, legal experts said, the Supreme Court case heard Wednesday. Mr. Trump announced on social media in late August that he would fire Ms. Cook. He claimed that she had engaged in mortgage fraud involving loan documents she signed before joining the Fed in 2022. She has not been charged with or convicted of a crime, and she vigorously disputes the allegations. Still, the president said that the allegations gave him sufficient “cause” to dismiss Ms. Cook under the federal law that established the Fed in 1913. Congress tried to ensure that Fed officials could set interest rates with the goal of attaining low, stable inflation and a strong labor market free from political pressure by setting 14-year terms for its leaders, known as governors, and only allowing presidents to remove them for “cause.” Among the key questions before the justices: how much discretion a president has to fire Fed officials, what counts as cause, and what kind of notice and due process officials should have before a president can remove them. The Trump administration is not challenging the constitutionality of the law establishing the Fed — distinguishing the case from one the justices heard in December that dealt with the president’s ability to fire other independent regulators. But the Justice Department said the courts cannot second-guess a president’s justifications or reinstate a fired official. “The president identified a valid cause for removing Cook: apparent fraud or gross negligence in a financial matter, which created a grave appearance of impropriety in her governance of American’s financial matters,” D. John Sauer, the solicitor general, wrote in a court filing. In response, Ms. Cook’s legal team said a person’s private conduct before he or she took office cannot be cause for removal, and that Mr. Trump’s stated reason for removing her was a “pretext” for policy disagreements. If any cause counts as cause, the team said, that is essentially the same as saying a president can remove a governor at will, which would eviscerate the central bank’s independence. Ms. Cook’s attorney Abbe Lowell provided a detailed response to the allegations in a November letter to the Justice Department and accused the administration of targeting the president’s perceived enemies. He acknowledged that Ms. Cook had improperly written that a Georgia apartment would be a primary residence in a 2021 mortgage application. But he wrote the notation was “plainly innocuous” because of other documents she submitted where she provided more specific disclosures about the property’s use as a vacation home. “There is no fraud, no intent to deceive, nothing whatsoever criminal or remotely a basis to allege mortgage fraud,” Mr. Lowell wrote in November. The Supreme Court is separately reviewing the president’s firing of another independent agency official. At issue in that case, which involves the Federal Trade Commission, are laws that say officials can only be fired by the president for “inefficiency, neglect of duty or malfeasance in office” Lower courts have sided with Ms. Cook. A District Court judge in Washington said Ms. Cook could not be removed for conduct that occurred before she became a Fed governor, nor for claims that did not involve her professional conduct. In a 2-to-1 decision, the U.S. Court of Appeals for the D.C. Circuit also backed Ms. Cook. Tenure protections for the Fed were devised to “assure members of the Board of Governors — and national and global markets — that they do not serve at will and thus enjoy a measure of policy independence from the president,” wrote Judge Bradley N. Garcia, who was joined by Judge J. Michelle Childs, both nominees of President Joseph R. Biden Jr. Judge Gregory G. Katsas dissented, writing that the president had invoked a cause related to Ms. Cook’s “conduct, ability, fitness, or competence” and that courts do not typically “look behind” a valid justification. Judge Katsas, a nominee of Mr. Trump, warned that ruling out conduct that occurred before someone joined the government could protect an official who bribed a lawmaker to ensure confirmation or even committed murder before taking office. Whether the law requires she be afforded due process — and what that process would look like if it does — are among the questions the Supreme Court will consider. At a minimum, Ms. Cook’s lawyers told the court, due process requires formal notification of the charges against her and a hearing at which she can tell her side of the story. Instead, her lawyers said, Mr. Trump rushed to judgment. In August, Bill Pulte, the director of the Federal Housing Finance Agency, said on social media that he had referred allegations about Ms. Cook’s banking records to the Justice Department for a criminal inquiry. (She has not been charged with any crime.) Thirty minutes later, Mr. Trump posted that “Cook must resign, now!!!” Five days later, he said he was firing her, also on social media. Ms. Cook’s lawyers argued that Mr. Trump’s haste violated her rights. “At no point did he invite a response to the allegations — to the contrary, his public comments made clear that he was not interested in hearing Governor Cook’s response and that she should either ‘resign’ or be ‘fired,’” they wrote. D. John Sauer, the solicitor general, disagreed. “The president provided enough process by publicizing the criminal referral against Cook, then waiting five days before removing her,” he wrote in a Supreme Court brief. In the meantime, he said, she could present her defense. No hearing was required, Mr. Sauer added. Indeed, he wrote, it was not clear “what the hearing would look like or how it could make any difference here, given Cook’s failure to identify in her briefs which factual allegations she would dispute.” Arguments about due process, Mr. Sauer said, were a recipe for needless delay. “When Congress makes principal officers removable ‘for cause’ without prescribing any process,” he wrote, “this court should not allow them to evade removal — and trigger further constitutional concerns — by insisting upon a hitherto unspecified process that lower courts would presumably have to devise and implement in months of further litigation.” In November, Ms. Cook’s lawyers set out her response to the accusations against her in a letter to the Justice Department, calling them pretextual and baseless. In a supplemental brief, Mr. Sauer called the letter “too little, too late.” “Regardless,” he added, “the proper remedy for any procedural defect would be, at most, to require a hearing, not to reinstate Cook.” The Supreme Court on Wednesday is considering just how fortified that removal protection should be, as the justices hear arguments in the case revolving around Lisa D. Cook, a governor at the central bank who is suing President Trump for trying to fire her. Ms. Cook’s future at the Fed is not the only thing at stake. If the Supreme Court sides with Mr. Trump, legal experts warn that the independence of the central bank could be in jeopardy. “We are at the top of a slippery slope,” said Gary Richardson, who served as the Fed’s historian and is now an economics professor at the University of California, Irvine. “The Supreme Court will push us further down that slope if the justices rule against Cook.” The Federal Reserve Act stipulates that a president can only remove an official at the Fed “for cause,” which is typically interpreted to mean malfeasance or gross misconduct while carrying out the duties of the job. The term has never been well-defined, because no president has tried to remove a policymaker at the central bank. Mr. Trump said he had “cause” to fire Ms. Cook citing allegations of mortgage fraud. But Ms. Cook, who has not been charged with a crime, has argued that this is about the president’s desire for lower interest rates. Speaking at the World Economic Forum in Davos, Switzerland on Wednesday, Mr. Trump said the United States “should be paying the lowest interest rate of any country in the world.” As part of the administration’s pressure campaign, the Justice Department has also launched a criminal investigation into Jerome H. Powell, the Fed chair, over his handling of renovations underway at the central bank’s headquarters in Washington. Mr. Powell, who is attending Wednesday’s oral arguments, took the extraordinary step of calling out the administration for trying to use legal threats to coerce the central bank into delivering to the president the policy settings he wants. Removal protection is just one of many guardrails Congress put in place. To further protect the institution from political meddling, the Fed’s politically appointed and Senate-confirmed governors are also given staggered 14-year terms. That helps ensure that officials are not beholden to election cycles and instead think about what is best for policy over time. Interest rate decisions, which Congress stipulated should be aimed at achieving a healthy labor market and low, stable inflation, are also made by a 12-person policy committee. That includes all seven members of the board of governors, the president of the Federal Reserve Bank of New York and a rotating set of four other presidents of the 12 regional Reserve Banks. Those presidents are not handpicked by the president, but are instead selected by local directors. The Fed’s board can ultimately veto who is picked for those positions, but it is not the only body involved in the selection process. Lawmakers also gave the Fed the authority to control its own budget and staff, further insulating the central bank. But these guardrails are only powerful so far as they are reinforced when tested. “Giving the president the authority to remove people at will means that the other defenses against encroachments on Fed independence are gravely weakened,” said William B. English, a Yale professor and a former director of the Fed’s division of monetary affairs. He added: “If the president can fire people from the board, then I don’t think there’s any real protection left, and you have the White House able to control monetary policy.” Historians typically point to the 1970s as an example of why ceding that control to the White House is so economically damaging. President Richard M. Nixon, who wanted lower borrowing costs to boost the economy ahead of the 1972 election, installed Arthur F. Burns, his economic adviser, as Fed chair in 1970. Mr. Burns, who led the central bank until 1978, bowed to that political pressure and helped to unleash one of the worst bouts of inflation in the country’s history. The Fed was unable to tame price pressures until Paul A. Volcker took over as chair in 1979 and sharply raised rates. That caused a painful recession that drew political outcry, but it forced inflation down and put the economy on more stable footing. “If Volcker hadn’t succeeded in making price stability the fundamental prerequisite for the operation of the free-market economy, we would have lost that economy and our productivity,” said Robert L. Hetzel, who worked as an economist at the Richmond Fed from 1975 to 2018. Mr. Hetzel warned that the Trump administration’s efforts to gain more latitude over officials at the Fed were dangerous, and risked undermining the central bank’s ability to make economically necessary, but politically painful, policy decisions. “If they decide against Cook, then this process of taking over the Fed is greatly accelerated, and we just jumped back into the 1970s,” Mr. Hetzel said. In removing the leaders of other independent agencies, Mr. Trump has given no reasons, saying he has the unilateral constitutional authority to control the executive branch, even in the face of congressional efforts to shield officials from political interference. The Supreme Court has lately sided with that view, rejecting statutes that have been on the books for decades requiring presidents to supply a reason for removing officials. But with the Fed, Mr. Trump has tried something new. This time, he explained in a letter to Ms. Cook, there was “sufficient cause” to remove her. He accused Ms. Cook of mortgage fraud by designating two different properties as her primary residence in 2021, the year before she was appointed by President Joseph R. Biden Jr. Ms. Cook responded that “no cause exists under the law” to allow her removal and fought to keep her job. This fight raises a series of questions with no definitive answers: What is sufficient cause? Must it be job-related? And who decides? In Ms. Cook’s case, her actions preceded and so did not arise from her work at the Fed. She has not been charged with a crime, and has not had an opportunity to present her side to a judge or other neutral party. The legal terrain is surprisingly uncharted because attempts to remove leaders of independent agencies for cause are exceedingly rare. Until Ms. Cook, no president had tried to fire a Federal Reserve governor. Legal experts said the Supreme Court’s recognition of the Fed’s central role in the American economy suggested that it would require compelling proof and a clear connection between the asserted misconduct and Ms. Cook’s official duties. Asked what kinds of misconduct would satisfy the “for cause” requirement, Lev Menand, a law professor at Columbia, listed a few: accepting a bribe, engaging in other corruption in office and failing to attend meetings. All of his examples were connected to her official duties. More than 30 federal laws say that leaders of executive agencies, including the Federal Trade Commission and the National Labor Relations Board, can only be removed for some combination of “inefficiency, neglect of duty and malfeasance.” Another 20 or so, like the one governing the Fed, allow removal of agency leaders for cause. Throughout his second term, the president has openly chased a majority on the Fed, a set of allies who can deliver on his desire for sharp, swift cuts in interest rates. Even though the central bank is supposed to be independent, Mr. Trump has made clear he expects his appointees to share his views and lower borrowing costs dramatically, perhaps to 1 percent. In court, the Trump administration has strenuously steered clear of this rhetoric. Lawyers have argued that Mr. Trump possesses the power and rationale to dismiss Ms. Cook, a governor, over allegations that she engaged in mortgage fraud before joining the Fed. Lawyers for Ms. Cook have disputed the charges and have described her attempted firing as rooted in political pretense. Outside of court, though, the president has struck a far different tone. Even when not commenting on Ms. Cook, he has boasted about the changes he hopes to bring to the Fed. “We’ll have a majority very shortly,” Mr. Trump said at one point during a cabinet meeting in August. “So that’ll be great.” Already, three of the members of the seven-person Fed board are Mr. Trump’s appointees: Michelle W. Bowman and Christopher J. Waller were confirmed by the Senate in his first term, and Stephen Miran, one of the president’s economic advisers, joined last year. Ms. Bowman and Mr. Waller have not cowed to the president’s demands and have called for far more gradual rate cuts than Mr. Trump has endorsed. Mr. Miran, who was chosen to fill a short vacancy, has been more aggressive. He has said he could return to the White House once his time on the board is complete. Mr. Trump may stand to gain another appointee this year if Jerome H. Powell, the chair of the Fed, leaves after his term expires in May. Mr. Powell could opt to stay as a governor through 2028, though Mr. Trump would still have the opportunity to designate a new chair. An announcement is possible next week, according to the president’s aides. In the meantime, the president has sought to maximize the pressure on Mr. Powell, who is now under investigation by the Justice Department, a probe that the Fed chair has described as political retribution. And Mr. Trump has frequently stressed on social media that he expects his nominee to echo his views on monetary policy. “Anybody that disagrees with me will never be the Fed Chairman!” he said at one point last month. Speaking on Wednesday at the World Economic Forum in Davos, Switzerland, though, Mr. Trump appeared to lament the fact he may not be able to exert control over the Fed chair once in office. He nominated Mr. Powell to his current post, after all, in 2017. “The problem is, they change once they get the job,” Mr. Trump said. Along with firing Ms. Cook and removing Mr. Powell, the president has even suggested he could try to investigate the legitimacy of other board members appointed by his predecessor, Joseph R. Biden Jr. At a rally in December, he openly tasked his administration with investigating whether those Fed officials could or should be removed. Musing aloud that a “couple of them” might not have been legally authorized to join the Fed, the president seemed to delight at the vacancies that could be gained from their dismissals. “We’ll take two,” Mr. Trump said.