Supreme Court appears likely to allow Lisa Cook to remain on Fed board

The Supreme Court on Wednesday appeared likely to block President Donald Trump from immediately firing Democratic-appointed 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 skeptical questions of Solicitor General D. John Sauer during roughly two hours of arguments, taking issue with most aspects of the 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 at the deeply polarized court.

Conservative Justice Brett M. 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 from both parties could gin up reasons to fire 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 incentivizes that?” Kavanaugh asked.

The president has complained for months that the Fed is not dropping interest rates quickly enough. He has tried to oust Cook, alleging she committed mortgage fraud, and his Justice Department has launched a criminal probe of Fed Chair Jerome H. Powell to determine whether he lied to Congress.

Both Cook and Powell have denied wrongdoing and have accused Trump of manufacturing pretexts to undermine the independence of the central bank to achieve his policy goals. The president’s efforts have alarmed many economists, who fear that keeping interest rates artificially low could lead to 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 under tighter control parts of the government that for decades have operated independently. 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 chair Ben S. Bernanke.

A ruling for Cook could allow her to remain in her position on the Fed board until a final decision is reached in her lawsuit, which could take months or even years.

The justices, in emergency rulings, have repeatedly backed Trump’s bids to fire the heads of independent agencies in his second term, but in a major shift Wednesday, justices at both ends of the court’s political spectrum seemed ready to draw a red line around the Fed.

Many signaled that they wanted additional legal proceedings, perhaps in lower courts, before deciding a novel and weighty legal issue on the merits, while Chief Justice John G. Roberts Jr. said he might favor going ahead and ruling.

Conservative Justice Samuel A. Alito Jr. 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 counseled caution.

Liberal Justice Sonia Sotomayor said the public’s confidence in the court’s decision would benefit from a hashing out of significant factual and legal issues before a ruling was issued.

“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 a president’s control 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 for her removal and that Trump 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 that 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 favorable interest rates for herself,” Sauer said.

Paul D. Clement, Cook’s attorney, said judges do 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 an 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 attorneys 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 U.S. 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 $2.5 billion renovation of the Fed’s headquarters. Powell has 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.

The arguments Wednesday were a notable shift from a case in December dealing with the legality of Trump’s firing of a Democrat from the Federal Trade Commission, another independent agency, without cause. That case could also affect Cook’s job at the Fed.

In that case, Sauer told the justices that Trump had inherent authority under the Constitution to remove members of independent agency boards, even though Congress set up those agencies to operate at a remove from the executive.

Some of the court’s conservative justices and many officials in the Trump administration have expressed support for an idea known as unitary executive theory, which holds that the Constitution gives the president broad authority to fire officials and that Congress cannot limit it.

Agencies like the FTC, the Securities and Exchange Commission, and the Federal Election Commission operate as “a headless fourth branch” of government not fully accountable to the voters who elected the president, Sauer told the justices in the FTC case.

The conservative majority on the court seemed to embrace that argument, possibly clearing the way for them to strike down a 90-year-old precedent, known as Humphrey’s Executor, that says Congress can limit the president’s ability to dismiss the heads of independent agencies.

“I think broad delegations to unaccountable independent agencies raise enormous constitutional and real-world problems for individual liberty,” Kavanaugh said then.

But Kavanaugh also suggested that the court sees the central bank as different and might carve out a rule protecting it. Whether or not it affects the Fed, a ruling striking down Humphrey’s Executor would be one of the largest changes to the structure of government in decades. A decision in that case is also expected by the summer.

Some Fed watchers said Wednesday that 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 defense.”