Federal lawmakers are back from their long August recess, but President Donald Trump and top White House officials may not have their focus concentrated on Capitol Hill at this particular moment.
In fact, they are more likely to be looking toward the judiciary.
The Trump administration has recently suffered some serious legal losses. Last week, the U.S. Court of Appeals for the Federal Circuit ruled that several of the president’s trade policies violated the U.S. Constitution. Yesterday, the U.S. Court of Appeals for the Fifth Circuit determined the Trump administration could not use an 18th-century law to justify deporting migrants from Venezuela.
There have been others as well, but President Trump is likely to ask the U.S. Department of Justice (DOJ) to appeal both of those rulings to the Supreme Court. And there soon may be a third case that reaches that level too: litigation involving President Trump’s termination of Federal Reserve Governor Lisa Cook.
Let’s recap this matter before tackling what it means for Federal Reserve independence and previewing upcoming Fed interest rate decisions that President Trump may — or may not — like.
Why Did President Trump Fire Lisa Cook?
President Joe Biden nominated Lisa Cook to serve as a Federal Reserve governor on January 14, 2022. Her nomination did not sail through Congress. Indeed, she was confirmed that May on a 50–50 vote in which the tie was broken by former Vice President Kamala Harris. Still, the vote was enough to give Cook a seat on the Fed. She took office on May 23, 2022.
Twenty seven months later, on August 25, President Trump announced he had fired Cook from her position due to “deceitful and potentially criminal conduct.”
As readers may recall from recent discussions about the potential removal of Fed Chair Jerome Powell, the president can only fire Federal Reserve members for “cause.”
The cause President Trump cited for his removal of Cook? Mortgage fraud. Trump administration officials have argued that Cook lied on a mortgage application by claiming two primary residences. Cook’s lawyers said she made a simple mistake — a “clerical error” — but the Trump administration has said, “making facially contradictory statements in financial documents” is “more than sufficient ground for removing a senior financial regulator from office.”
Cook filed a lawsuit challenging her termination, and that challenge centers around two questions: whether she actually was fired for cause and whether her right to due process was violated since she was not given an opportunity to respond to the allegations of mortgage fraud.
The case is now before U.S. District Court Judge Jia Cobb. Last week, Judge Cobb acknowledged the case raises “important” and “novel” questions that federal courts may not have considered before. According to The Hill, Judge Cobb also said she is “uncomfortable” with some of the legal arguments Cook’s lawyers have made, but is similarly “uncomfortable” with the notion that the Trump administration may be trying to “dig up dirt” on members of the Federal Reserve in order to sway interest rate policy. (More on this claim in the final section below.)
Observers could see an initial ruling in this case as early as tomorrow.
Yesterday, Judge Cobb gave the Trump administration until Thursday to submit a supplemental filing. Once the administration has submitted those arguments, Judge Cobb will rule on whether Governor Cook can continue to work at the Fed while the case is making its way through the court system.
Will Cook win her suit?
That answer is, of course, anyone’s guess, but this morning Politico noted a three-judge panel from the U.S. Court of Appeals for the Federal Circuit ruled that President Trump’s termination of Federal Trade Commission member Rebecca Kelly Slaughter was illegal. The court reinstated Slaughter, arguing in a 2-1 decision that “commissioners can only be removed for “inefficiency, neglect of duty, or malfeasance in office” and that the president had not cited a reason for her firing.
The Cook Case And Fed Independence
Last Friday, District Court Judge Cobb cited one other matter that could influence her decision in the Cook case: Fed independence.
“I keep returning to the unique nature of this board and the need for independence,” said Cobb.
In her lawsuit, Cook’s lawyers also raised this issue, arguing, “The operational independence of the Federal Reserve is vital to its ability to make sound economic decisions, free from the political pressures of an election cycle.”
As this blog noted back in July, Fed independence is a concept that dates back to the 1950s. (The Fed itself was established in 1913.) After a disagreement between Federal Reserve policymakers and President Harry Truman on interest policy, on March 4, 1951, the Fed and the U.S. Department of the Treasury issued a joint statement, now known as the Fed-Treasury Accord, that formally ended the Fed’s obligation to maintain a fixed interest rate on government bonds. Under the accord the:
- Treasury acknowledged the Fed would no longer peg interest rates to support Treasury financing;
- The Fed regained full control over open market operations, allowing it to raise rates to combat inflation without Treasury influence; and
- The Truman administration agreed to establish a clear institutional boundary between the Treasury, which would be responsible for fiscal policy, and the Fed, which would be responsible for monetary policy.
The Accord was a watershed moment for the Fed’s independence, and formed the basis of the idea, still held today, that the Fed should be immune from political influence when setting monetary policy.
Cook and her lawyers are not the only ones who believe Fed independence is at risk.
As the newsletter Morning Brew said last month, “[The Cook case] would have sweeping implications for the Fed’s independence from White House influence, which many economists view as key to the central bank’s ability to make wonky (and politically unpopular) interest rate decisions.”
How Will The Cook Case Affect Fed Interest Rate Policy?
While the court case and questions about Fed independence move forward, Cook is still on the job. As Politico noted this morning, however it is “unlikely she would be in a position to cast a formal vote on interest rates or regulations until [she] has at least handed down an initial take on whether she was afforded due process.”
The next interest rate decision will be announced on September 17, following a two-day Federal Open Market Committee (FOMC) meeting.
Cook’s attorney Abbe Lowell has suggested Cook’s silence in September is exactly what President Trump wants. He alleged the president’s decision to fire Cook has nothing to do with her mortgage application. “‘For ‘cause’ means she won’t go along with an interest rate drop,” Lowell said last week.
Other Fed governors are falling in line behind President Trump’s preferred position, however. Indeed, Governor Christopher Waller recently reiterated his support for cutting interest rates this month, and for additional cuts over the next three to six months. Fed Chair Jerome Powell also has indicated that conditions may warrant an interest rate cut.
At this point, markets are banking on a cut.
According to Seeking Alpha, analysts believe there is an 86 percent probability that the FOMC will cut the federal funds rate by one-quarter of a percentage point. (There is a one-seventh chance of no change, Seeking Alpha said, and “continued inflation above the two percent target argues strongly for no change in September, or indeed, through the end of the year.”)
At the same time, the Cook court case is moving forward and the Fed is contemplating its next interest rate move, the U.S. Department of the Treasury and Republicans on Capitol Hill are contemplating future Fed personnel shifts. Next week, the Senate Banking Committee will hear from Stephen Miran, President Trump’s nominee to fill an open Fed board governor seat. And yesterday, according to Politico, Treasury Secretary Scott Bessent began interviewing candidates to be the next Fed chair when Jerome Powell’s term ends in May 2026.
And, of course, if Lisa Cook loses her court challenge and is removed, President Trump will have an opportunity to fill another board seat.
Stay tuned.