Fed Independence Reaches Its Moment of Truth as Supreme Cour

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Dow Jones NewsSep 26, 1:00 AM UTC
DJ Fed Independence Reaches Its Moment of Truth as Supreme Court Weighs Cook's Fate -- WSJ

By Nick Timiraos

 

The Supreme Court is poised to decide whether President Trump can remove Lisa Cook from the Federal Reserve's board in a case that economists and former Fed officials say threatens to severely erode decades of central bank independence.

 

Trump's broad challenge over interest-rate policy, which began with sustained criticism but has moved to direct action to remove governors, "represents an existential crisis for the Fed," said Ethan Harris, former head of global economic research at Bank of America.

 

The Trump administration has asked the Supreme Court to overturn lower court rulings that said Cook could stay on the job while she challenges the White House's attempt to fire her. A ruling in favor of the White House wouldn't necessarily be the final word on the matter. But analysts said it would be a crucial development that opens the door for Trump to replace other Fed governors, flattening 90 years of legal precedent that insulated central bank officials from political control.

 

"That's sort of the nightmare scenario if you believe in Fed independence," said Harvard economist Kenneth Rogoff, who wrote a seminal paper on central bank independence in 1985. "If Trump succeeds with Lisa Cook, what's to stop him from targeting other governors and take them down one by one?"

 

Rogoff was one of 18 signatories on a friend-of-the-court brief filed Thursday that urged the Supreme Court to let Cook stay on the job for now. The brief was signed by every living former Fed chair -- Alan Greenspan, Ben Bernanke and Janet Yellen -- as well as senior economic advisers to Republican and Democratic presidents.

 

Cook's legal challenge has become the defining battle in Trump's effort to reshape the relationship between the White House and the Fed. Since the Fed's founding in 1913, no president has attempted to dismiss an officeholder. Congress restructured the central bank in 1935 to insulate presidentially appointed governors from political pressure, giving them 14-year terms and protection from removal except "for cause."

 

For months, Trump has badgered Fed Chair Jerome Powell and his colleagues to lower rates. The pressure campaign escalated dramatically in August, when Trump said he would attempt to remove Cook, who has consistently voted with Powell. The president cited allegations that she misrepresented personal information about two mortgages she obtained the year before she became a Fed governor. Cook sued to block her firing, and her lawyers have argued that she should be allowed to stay at the Fed while her lawsuit proceeds.

 

She hasn't been charged with a crime. Her lawyers have said she didn't commit fraud and was deprived of any process to defend herself against allegations.

 

The Trump administration had previously concluded that courts likely wouldn't sanction the removal of a Fed governor over a policy dispute. When the Supreme Court granted the administration's emergency requests to remove federal commissioners in May, the court went out of its way to suggest the Fed enjoyed a special status that might protect officers from removal over a policy dispute.

 

The mortgage allegations represent the Trump administration's attempt to work within the court's framework. Legal experts say this approach tests the boundaries of what constitutes legitimate grounds for dismissing a Fed governor, avoiding a head-on challenge to the central bank's policy independence.

 

The Trump administration has argued in court that when the president fires a Fed governor for cause, courts have no authority to review whether the cause was actually sufficient. Some lawyers say that would gut the removal protection that Congress provided in 1935 and allow every president to replace the entire Fed board.

 

" 'For cause' could mean absolutely anything," said Scott Alvarez, who served as the Fed's general counsel from 2004 to 2017. "What's at issue is what is the definition of 'cause,' and depending on how broadly the Supreme Court reads the term will tell us a lot about how independent the Fed is."

 

In a filing to the court on Thursday, Cook's lawyers said that removing her even temporarily from her job would signal to financial markets that the Fed is no longer independent. "Granting the President's request...would sound the death knell for the central-bank independence that has helped make the United States' economy the strongest in the world," they said.

 

The high inflation of the 1970s, which followed years of pressure from the White House to keep rates low, helped to re-establish a broad consensus that the Fed should operate independently from the executive branch. In the decades since, that consensus has faced periodic challenges from lawmakers and commentators, but never such a direct assault from the president himself.

 

For decades, "there was a consensus that leaving the Fed alone was best for the economy and financial markets, which I think is correct," said Harris. "Recent presidents lived up to that, and Trump has flipped the script."

 

In crafting the 1935 protections, lawmakers relied on a Supreme Court ruling from the same year that said a policy dispute wasn't grounds for President Franklin D. Roosevelt to dismiss "for cause" a member of the Federal Trade Commission appointed by President Herbert Hoover.

 

Legal scholars who favor broad presidential powers contend that Fed independence and limits on the president's removal authority are constitutionally suspect. They warn that shielding any elite institution from electoral accountability would make it too powerful, creating an unelected fourth branch of government that the nation's founders never contemplated.

 

"The Constitution very strongly presumes that the best outcomes will be obtained through clear chains of political accountability," said Trent McCotter, a partner at Boyden Gray who filed a brief supporting Trump's position. "In the long run, independent entities become insulated, and they're not answerable to anybody."

 

Rogoff predicted that an erosion of the Fed's independence would lead investors to anticipate higher inflation and, as a result, raise long-term U.S. interest rates. "But how dramatically that unfolds, I hesitate to say. It's not going to happen overnight," said Rogoff. "It's a long-term catastrophe, but short term, it might not be."

 

Tiff Macklem, governor of the Bank of Canada, said Tuesday that such concerns may already be percolating in markets. During turbulent times, investors have typically sought out dollar-denominated assets as a security blanket. But the value of the U.S. dollar as a hedge today "may not be as reliable as it was," Macklem told reporters in Saskatchewan.

 

"I'm not saying this is all related to President Trump's threats on the Fed," Macklem said. "But I do think you are starting to see some impacts, and in that sense, it's time to talk about it."

 

It could prove difficult for the Fed to re-establish its independence if it is lost, said Rogoff. He compared the predicament to the difficulty many countries faced after leaving the gold standard during World War I and trying to restore it in the 1920s.

 

"Once people have seen that you would take it away, they think you'll take it away again. You won't ever be able to put the genie back in the bottle," Rogoff said.

 

Treasury Secretary Scott Bessent has referred to monetary policy independence as a "jewel box" that should be preserved. But he and others have also said the Fed and its supporters have used independence as a shield to avoid scrutiny of policy choices.

 

When asked this month if he thought the Fed should be independent, Trump's answer captured this tension. "It should be," he said. "But I think they should listen to smart people like me."

 

Write to Nick Timiraos at [e-mail]

(END) Dow Jones Newswires

 

September 25, 2025 21:00 ET (01:00 GMT)

 
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