The US Supreme Court has preserved the independence of the Federal Reserve Board, for now, but by the narrowest of margins.
In a 5-4 decision, the court’s majority ruled that Fed governor Lisa Cook – who Donald Trump had purported to sack on the basis of allegations of mortgage fraud – could remain on the board until the allegations had been tested and Cook given the opportunity to defend herself.
The judgment – and a concurrent ruling that a president has complete authority over every other government agency – confirms the unique status of the US central bank, which Chief Justice John Roberts rightly described as one of America’s and the world’s most important financial institutions.
It’s a setback for Trump, who had sought to remove Cook (via a social media post) and former Fed chair Jerome Powell from the board, based on allegations levelled by Trump loyalist Bill Pulte, the former director of the Federal Housing Finance Agency and now acting director of national intelligence. Trump wanted to get rid of Cook and Powell in order to stack the seven-member Fed board with more amenable appointees.
Undaunted, Trump has vowed to continued with his pursuit of Cook, posting on Truth Social that the “Cook lawsuit” had been “sent back” by the Supreme Court on “strictly procedural” grounds and that he would take immediate action to make sure that “someone who has committed wrongdoing will not be making vital decisions concerning the Welfare of the United States of America!”
The Supreme Court majority, however, thought it unlikely that the administration’s efforts to remove Cook for cause would succeed.
The Supreme Court ruling was about the process required to oust someone from the Fed’s board – unlike the decision it made with regard to other agencies previously regarded (for nearly a century) as independent, where no cause now has to be established and Trump can unilaterally remove anyone he wants to.
Effectively, the majority ruled that Cook has to be given the opportunity to respond to the allegations and that the administration will have to establish that the “for cause” threshold in the Federal Reserve Act, generally thought to have to involve serious wrongdoing or malfeasance, has been met.
“At minimum, Cook was entitled to some explanation of the evidence at issue, some avenue for a response, and a deadline by which a response would be due,” Chief Justice Roberts wrote.
Cook was accused by Pulte (in a social media post, naturally) of having misled her lender by claiming two separate properties as her principal place of residence in order to gain a lower interest rate.
The New York Times, however, has reported that her application for loans make it clear that one of the properties was a vacation or second home, which would suggest the lender knew, or should have known, that it wasn’t her principal place of residence.
Pulte, who has made similar allegations of mortgage fraud against others who have displeased Trump, provided the pretext for Trump to fire Cook and open up a place on the Fed board – as he did with the attempt to prosecute Powell over his congressional testimony about cost overruns in the renovation of the Fed’s headquarters.
The court has now ruled that Trump doesn’t have the power to sack a Fed governor on a whim or because they won’t do what he wants. They are entitled to due process.
That’s a win for the Fed and its governors and even for Trump’s newly appointed chairman, Kevin Warsh, who now knows that Trump can’t dump him from the board if he doesn’t deliver the interest rate cuts that Trump expects of him and which motivated Trump to try to get rid of Powell and Cook.
When the Fed was established in 1913 its structure was designed to make it independent of the executive, with staggered 14-year terms for the governors (Cook’s doesn’t end until 2038) and the ability of a president to remove a governor dependent on the “for-cause” threshold.
“The protection from removal enjoyed by governors of the Federal Reserve is consistent with the Constitution,” Chief Justice Roberts wrote.
“The founders knew from experience the calamities that could arise from even the suspicion of political manipulation of monetary policy.”
The majority judgment said that a president’s removal of a governor while litigation was ongoing would significantly interfere with the independence of the Federal Reserve and transform its for-cause protection into “at-will employment.”
If Trump had his way – if he could seize control of the Fed as he now can control other government agencies – the Fed would be slashing US interest rates even as the US inflation rate continues to climb.
It said Congress had created the Fed to operate with independence from the president.
“Any change to that scheme must come from Congress. That is why we cannot accept the government’s contentions in this case. To do so would be to allow the president to remove a member of the Federal Reserve at any time, for any reason, without any notice before, and without any judicial checks after,”
The Fed’s independence is fundamental to its credibility and the functioning of the US bond market, which is at the core of the global financial system, the status of the US dollar as the world’s reserve currency and the US government’s ability to attract international investor support for its funding.
With almost $US40 trillion ($58.2 trillion) of federal government debt, the Trump administration needs that support, which could evaporate if investors – whether domestic or foreign – believed the Fed would be driven by the political cycle, rather than its convictions about the longer term needs of the economy.
Every living former Fed chair, including Alan Greenspan, who died last week, submitted a “friend of the court” brief in support of Cook and the Fed’s continued independence, underscoring how important they thought the issues at stake were.
If Trump had his way – if he could seize control of the Fed as he now can control other government agencies – the Fed would be slashing US interest rates even as the US inflation rate continues to climb.
Control of the Fed and other government agencies was one of the objectives of the conservative Heritage Foundation’s Project 2025 manifesto that has provided the blueprint for Trump’s second term. (Interestingly, the author of the Project 2025 chapter on the Fed, Paul Winfree, has been appointed by Warsh to one of the five taskforces charged with coming up with reforms to the way the bank operates).
For the moment, that aspiration has been dashed and the Fed’s unique status – a status generally respected and protected by previous administrations – preserved.
The slim margin by which the status quo was upheld, the court’s failure to define where the threshold of the for-cause bar to a governor’s removal might lie and an autocratic president’s determination to wrest control of every government institution mean, however, that the threat to Cook and to the Fed’s independence if Trump or a successor were able to stack the board hasn’t been completely extinguished.
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