Federal Reserve Governor Lisa Cook and her lawyer Abbe Lowell, depart the US Supreme Court in Washington, DC. Photo / Brendan Smialowski, AFP
The United States Supreme Court today appeared likely to block US President Donald Trump from immediately firing Democratic-appointed Governor Lisa Cook from the Federal Reserve Board, a move that would prevent Trump from exerting greater influence over the powerful central bank that guides the economy.
Nearly all of the justices asked sceptical questions of Solicitor-General John Sauer during roughly two hours of arguments, taking issue with most aspects of the US Government’s case that the President had met the legal bar to remove Cook while a lawsuit challenging her removal plays out.
Such agreement is rare on high-profile cases for a deeply polarised court.
Conservative Justice Brett Kavanaugh said the Trump Administration’s position that it could remove Fed governors without judicial review or due process “would weaken if not shatter the independence of the Federal Reserve”.
He said presidents of both parties could gin up reasons to remove governors under such a system with dangerous implications for a central bank that Congress created to operate independently.
“What are we doing when we have a system that incentivises that?” Kavanaugh said.
The President has complained for months that the Fed is not dropping interest rates quickly enough. He has tried to oust Cook over mortgage fraud allegations, and his Justice Department has launched a criminal probe of Fed Chairman Jerome Powell over whether he lied to Congress.
Both Cook and Powell have denied wrongdoing and accused Trump of manufacturing pretexts to undermine the independence of the central bank to achieve his policy goals. The campaign has alarmed many economists, who fear keeping interest rates artificially low could spark long-term inflation.
The Supreme Court’s ruling, which is expected in the coming weeks or months, is one of the most significant tests to date of Trump’s push to expand presidential power and place parts of the Government that for decades have operated independently under tighter control.
It could also have major ramifications for the economy and is being closely watched by businesses and the markets.
In a sign of the stakes, both Powell and Cook attended the arguments, as did former Fed chairman Ben Bernanke.
The justices have repeatedly backed Trump’s bids to fire the heads of independent agencies in emergency rulings in his second term, but in a major shift today, justices at both ends of the court’s political spectrum seemed ready to draw a red line around the Fed.
Many signalled that they wanted additional legal proceedings, perhaps in the lower courts, before deciding a novel and weighty legal issue on the merits, while Chief Justice John Roberts said he might favour going ahead and ruling.
Conservative Justice Samuel Alito asked Sauer why the Trump Administration was asking the court to resolve such a momentous case in a “hurried manner”.
Justice Amy Coney Barrett, also a conservative, pointed to a friend-of-the-court brief by former Fed governors warning that removing Cook could trigger a recession and counselled caution.
Liberal Justice Sonia Sotomayor said the public’s confidence in the court’s decision would benefit from hashing out significant factual and legal issues before issuing a decision.
“We know that the independence of the agency is very important and that that independence is harmed if we decide these issues too quickly and without due consideration,” Sotomayor said.
Congress set up the Fed to be insulated from control by the president so it could make difficult decisions, such as raising interest rates, that might not be politically popular but that are good for the overall health of the economy.
No president in the 112-year history of the Fed had tried to fire a governor from the board before Trump targeted Cook in August.
He alleged that she claimed two homes as primary residences at the same time to get a better mortgage rate. Cook denies the allegations.
The issue before the justices was whether the effort to fire her complied with the Federal Reserve Act, which says Fed board members can be removed only “for cause”. A federal judge and a divided appeals court temporarily blocked Cook’s removal, prompting the Administration to appeal to the high court.
In October, the justices allowed Cook to remain in her job while they heard the emergency appeal from the Trump Administration.
Sauer told the justices that the alleged mortgage fraud by Cook met the legal bar to remove her and that the President had lost confidence in her ability to do the job. He also said courts did not have the authority to review the President’s decision, a contention a handful of the justices disputed.
“The American people should not have their interest rates determined by someone who was, at best, grossly negligent in obtaining favourable interest rates for herself,” Sauer said.
Paul Clement, Cook’s lawyer, said judges did have the power to review Cook’s ouster.
He also said the mortgage fraud allegations, even if true, would not meet the legal bar to fire Cook, because she applied for her mortgages before she was appointed to the Fed by President Joe Biden in 2022. He added that Cook was never given the opportunity to defend herself.
“There is no reason to abandon more than 100 years of central bank independence on an emergency application,” Clement said.
The justices quizzed lawyers for both sides about what the removal of a Fed governor should entail: what constitutes “for cause”, whether the governor is entitled to a hearing and what latitude judges have to review a firing.
Justice Ketanji Brown Jackson, a liberal, sounded incredulous when Sauer said it was sufficient due process for the President to have indicated on social media that he intended to fire Cook. Jackson asked how Cook was supposed to defend herself from the allegations without some kind of hearing.
“Like, she was supposed to post about it [on social media] and that was the opportunity to be heard?” Jackson asked.
David Wilcox, a senior fellow at the Peterson Institute for International Economics and the director of US economic research at Bloomberg Economics, said he expects the justices to send the case back to lower courts.
He said the lower courts need to resolve a key procedural question: whether Cook was afforded adequate process.
“My guess is what the court will do is kick the can down the road,” he said, adding that it is risky to predict the outcome of the case based on oral arguments alone.
Some legal experts said Administration officials may have damaged their chances by launching the criminal probe of Powell this month, creating the impression that Trump’s efforts are more about reshaping the Fed board and policy than any alleged malfeasance by its leaders.
The Justice Department is probing whether Powell misled Congress about a US$2.5 billion renovation of the Fed’s headquarters. Powell forcefully pushed back on those allegations, calling them “pretexts” in a video posted on the Fed’s website.
“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.
Some Fed watchers said today the Cook case appeared unlikely to deal a fatal blow to the central bank’s independence.
But they also warned that the Fed is increasingly on the defensive - reacting to political pressure rather than setting the terms - and that without pushback from Congress and the markets, Trump could continue reshaping the institution in ways that erode its autonomy.
“It sounds to me that this case will not be the Waterloo for Fed independence,” said Mark Spindel, an investment manager who co-wrote a history of the central bank’s independence. “But the institution is clearly playing defence.”
Sign up to Herald Premium Editor’s Picks, delivered straight to your inbox every Friday. Editor-in-Chief Murray Kirkness picks the week’s best features, interviews and investigations. Sign up for Herald Premium here.