Supreme Court Reviews Trump’s Bid to Remove Lisa Cook from Federal Reserve

The Supreme Court is currently reviewing a significant case regarding the Federal Reserve, centering on Lisa D. Cook, one of its governors. This legal scrutiny stems from former President Donald Trump’s attempt to remove Cook from her position, claiming he had “cause” due to allegations of mortgage fraud. However, Cook contends that this action is politically motivated, stemming from Trump’s preference for lower interest rates.

Background on Federal Reserve Removal Protections

The Federal Reserve Act specifies that a president can only dismiss officials “for cause,” typically interpreted as misconduct or malfeasance. Historically, this clause has remained undefined, largely because no president has previously sought to remove a Federal Reserve policymaker.

Experts warn that the outcome of this case could significantly impact the independence of the central bank. Gary Richardson, an economics professor and former Fed historian, notes that a ruling favoring Trump could lead to greater presidential control over monetary policy, indicating we are on a “slippery slope.”

Political Pressure and Legal Investigations

On the international stage, Trump criticized the current interest rates during an address at the World Economic Forum in Davos, Switzerland, suggesting the U.S. should have the lowest rates globally. This stance reflects an ongoing pressure campaign from the Trump administration regarding the Fed’s monetary policy decisions.

In a related move, the Justice Department has initiated a criminal investigation into Fed Chair Jerome H. Powell over renovations at the Fed’s headquarters. Powell, attending the oral arguments, condemned the administration’s legal threats aimed at influencing Fed policy, emphasizing the need for the central bank’s independence.

Guardrails of Federal Reserve Independence

Congress established multiple safeguards to maintain the Fed’s autonomy from political influences. These include:

• Staggered 14-year terms for the governors, ensuring they are not aligned with election cycles.
• A 12-person policy committee that makes interest rate decisions, composed of both board members and regional Bank Presidents.
• The Fed’s authority over its budget and staffing decisions, further shielding it from external political pressures.

Academics and former Fed officials argue that these protections are only effective if robustly upheld. Yale professor William B. English cautions that granting a president the power to easily dismiss Fed officials could dangerously weaken these institutional defenses. He believes this would enable the White House to exert significant control over monetary policy.

Historical Context and Economic Implications

Historically, there are examples highlighting the risks associated with political interference in monetary policy. For instance, during the 1970s, President Richard Nixon’s influence led to higher inflation due to his appointment of Arthur F. Burns as Fed Chair. Burns yielded to political pressure, which resulted in significant economic repercussions.

Economist Robert L. Hetzel warns that Trump’s efforts to gain more control over the Fed could lead to similar outcomes as those disastrous years, where essential but politically unpopular economic decisions were sidelined. He firmly believes that a ruling against Cook could accelerate the erosion of Fed independence, potentially plunging the economy back into instability.