Washington
Throughout his second term, President Donald Trump has tried to bend the Federal Reserve to his will. On Monday, he suffered his biggest setback yet.
Trump last year tried to remove a sitting Fed governor, Lisa Cook, from the Fed’s powerful board, citing unproven allegations of mortgage fraud. No charges have been brought against Cook. But in a landmark case, the Supreme Court ruled against the president on Monday, saying the administration failed to give Cook the opportunity to address those accusations, as required by law.
Pushing out Cook, a key Fed policymaker who votes on interest rates, could have given Trump an opportunity to appoint a replacement more aligned with his push for lower borrowing costs. In a statement after the court’s decision, Cook said Trump’s efforts to oust her were “an attempt to remove me on a manufactured pretext.”
It’s just one way that Trump and his allies have tried to pressure the politically independent US central bank.
But that effort has yielded few wins so far:
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Trump failed to push out Cook.
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His newly installed Fed chairman, Kevin Warsh, will likely not deliver any rate cuts this year.
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Former Fed Chair Jerome Powell has chosen to stay on as a governor, denying the president another appointment, potentially until 2028.
The ruling in the Cook case reaffirms a crucial legal guardrail for the Fed, in which central bankers have set interest rates based on economic data for the past several decades, and not the demands of a sitting president. That political independence has enabled the Fed to make decisions that might be unpopular in the short term, but that have the best interests of the US economy in mind for the long term. That’s especially important now, as the global economy attempts to right itself after the worst oil shock in history.
“If July 4th is the nation’s independence day, the Fed got its own five days early,” wrote Michael Reynolds, vice president of investment strategy at financial services firm Glenmede, in commentary issued Monday. He stated that Fed independence “underpins the credibility of the dollar” and Americans’ long-term faith in stable prices.
The Fed will remain independent — for now
A ruling against Cook would have set a dangerous precedent allowing Trump, or any future president, to push out any Fed official they disagree with, simply by citing “trivial or inconsequential or old allegations that are very difficult to disprove,” as Justice Brett Kavanaugh, a conservative who sided with his liberal colleagues in the 5-4 decision, described it during oral arguments from January.
In a concurrent opinion, Kavanaugh wrote that “uncertainty about the status of the Federal Reserve could spark political upheaval, including confusion about whether the President could immediately remove multiple Governors at will, as well as turmoil in the U.S. and world economies.”
But the ruling’s scope was narrow in that it mostly determined Cook wasn’t given proper due process. Trump announced Cook’s firing via a letter posted on social media. Chief Justice John Roberts wrote in the majority opinion that “without such protections, she could not properly dispute the charges the President laid against her.”
The ruling did not address whether there was enough cause to remove Cook, based on the fraud allegations brought forth by the administration. US Solicitor General D. John Sauer said in January that Cook’s designation of two properties as her primary address — a home in Ann Arbor, Michigan, and a condo in Atlanta — was “quite a big mistake.” A mortgage on a primary address typically yields favorable borrowing terms. But, generally, only one property can be claimed, unless there are extenuating circumstances. Cook has denied any wrongdoing and hasn’t been charged with any crime.
According to the Federal Reserve Act, a president can fire any Fed official “for cause,” which generally means malfeasance or a dereliction of duty.
“To be clear, the ultimate question of whether the President can remove Cook for cause will depend in part on the underlying facts,” Roberts said. “In this opinion, we have not addressed the facts, as they have yet to be found or analyzed under the relevant legal standards.”
Trump pushed back against the ruling on social media, signaling he may still seek to remove Cook.
“We will take appropriate action immediately to make sure that someone who has committed wrongdoing will not be making vital decisions concerning the Welfare of the United States of America!” he wrote on Truth Social on Monday after the Supreme Court’s decision.
Trump’s legal defeat isn’t his only problem: Fed officials are also signaling they don’t plan to lower borrowing costs any time soon, even with Warsh at the helm.
More than four months since the Iran war began, cargo ships still aren’t flowing freely through the Strait of Hormuz, a major trade chokepoint through which 20% of the world’s oil passes, in addition to various other commodities, such as aluminum and fertilizer. That has already jacked up inflation in America, with the Personal Consumption Expenditures price index — the US central bank’s preferred inflation gauge — reaching 4.1% in May, well above the Fed’s 2% target.
The fallout from the Iran war isn’t just delaying rate cuts, potentially until 2027, but it may also be raising the odds of rate hikes as soon as this year instead. Dallas Fed President Lorie Logan, who votes on policy moves for the next six months, said recently that the Fed may need to hike rates later this year if the inflation situation does not improve. For now, however, the Fed is poised to wait and see whether the seemingly fragile truce between the United States and Iran holds up, allowing inflation to ease.
“Given the elevated level of inflation, it is imperative that we restore it to our 2% longer-run goal on a sustained basis,” New York Fed President John Williams said Friday at an event in Jersey City. “The current stance of monetary policy is well positioned to do that.”
Trump has aggressively pushed for lower interest rates, repeatedly berating former Fed Chair Jerome Powell for not decreasing borrowing costs to the president’s liking. Trump has even joked that he would sue Powell’s successor, Warsh, if he didn’t cut rates.
But the fallout from the US-Israeli war means it’ll be tough for the new Fed chairman to argue for any rate cuts. While the leader of the central bank is a powerful policymaker who sets the agenda for every rate-setting meeting, they are only one vote out of 12 on the committee, which will continue to include Cook for now.
“I am grateful for this decision, not for my own sake, but for the sake of the American people, whose economic well-being depends on a central bank that answers to its mission, not political intimidation,” Cook said in a statement after the court released its decision.
