5 questions surrounding ousted Fed governor Lisa Cook

President Trump's move to fire Federal Reserve board of governors member Lisa Cook raised a host of questions over the unprecedented nature of his decision.

Chief among them is whether the allegations he cited reach the standard of cause needed to oust her — and to win that fight legally.

The president alleged Cook committed mortgage fraud by listing two different primary residences on official documents within weeks. Cook's attorney said Tuesday she plans to file a lawsuit challenging the attempt to fire her, and she has insisted that she will not resign from her role.

That lawsuit could come as soon as Wednesday, setting up a legal battle that could reach all the way up to the Supreme Court.

Here are five questions surrounding Cook's ouster.

When can a president fire a Fed official?

A president has never fired a central bank governor since the Fed was founded more than 100 years ago. While the law says a president could remove members "for cause," it doesn't define what type of "cause" could satisfy that standard.

Trump cited "sufficient cause" in his letter to Cook late Monday, naming the mortgage fraud allegations. Cook, in turn, pointed out that "no cause exists under the law."

Trump last week called for Cook, who was appointed by former President Biden in 2022, to resign following allegations by the head of the Federal Housing Finance Agency, Bill Pulte, that she committed mortgage fraud by listing two primary residences in Michigan and Georgia. But what is not clear is if those allegations are enough to clear the bar for "cause" to fire Cook. 

The allegations have been referred to the Department of Justice. Cook has not been charged with any crime.

Trump has relentlessly criticized Federal Reserve Chair Jerome Powell and the rest of the board for declining to lower interest rates. He has suggested he could pack the board with supporters of his and of lower interest rates, adding that he has "very good people" in mind to replace Cook.

He has said similar things about replacing Powell, whose term ends next May.

When asked if he would have moved to fire Cook if she voted to lower interest rates, Trump replied, "I think we have to have lower interest rates."

What did Cook allegedly do?

When Pulte initially accused Cook of mortgage fraud, he included photographs of document signatures apparently belonging to Cook that allegedly applied to two different primary residences, one in Michigan and another described as an "Atlanta condo."

Trump, in his letter, said she committed "deceitful and potentially criminal conduct in a financial matter" and that he didn't have confidence in her integrity as a result.

"At a minimum, the conduct at issue exhibits the sort of gross negligence in financial transactions that calls into question your competence and trustworthiness as a financial regulator," Trump said.

Cook last week responded to the allegations against her by saying she would not be "bullied to step down from my position because of some questions raised in a tweet." 

Mortgage occupancy fraud can include falsely claiming a home as a primary residence as a way to get a better term or interest rate on a housing loan. 

Robert Hockett, the Edward Cornell professor at Cornell Law School focused on financial and monetary law, argued that for-cause firing would likely have to entail a felony conviction and questioned the substance of the claims against Cook.

"If you look at the actual merits of the allegation, the actual claim, it's quite common for officials in Washington to live back and forth between two or more homes, to have to commute basically between homes. And so it's a perfectly plausible claim to say that you've got more than one primary residence when you've got that kind of job," Hockett said.

Adam Levitin, a Georgetown Law professor specializing in financial law, wrote that mortgage fraud may not be enough to trigger the for-cause provision.

"It's really no different than conviction for assault and battery arising from a bar brawl. At most, one might claim that the fraud indicates a lack of integrity or some general moral turpitude, but that isn't what 'for cause' removal is about. Just because someone is a rotten human being does not create legal grounds for removal," he wrote.

Are the allegations alone enough to warrant firing her?

It's unclear if the allegations against Cook would reach the for-cause standard needed for a president to fire her, but her attorney argued the move lacks legal authority.

"President Trump has taken to social media to once again 'fire by tweet' and once again his reflex to bully is flawed and his demands lack any proper process, basis or legal authority," Cook's lawyer Abbe Lowell said. "We will take whatever actions are needed to prevent his attempted illegal action."

Trump said Tuesday he's prepared for a legal fight, telling reporters, "always, you always have legal fights."

"She seems to have had an infraction, and she can't have an infraction," he added. "We need people who are 100 percent above board."

Hockett argued that the fact that no one has ever been removed from the Fed by a president highlights how high the threshold is to do so, predicting that Trump will have to take legal action to move forward.

"Trump is basically going to have to file some kind of action in a court. He's going to have to seek an injunction of some sort to prevent her participation on the board. And I can't imagine that any federal court will uphold Trump's action," he said.

The Supreme Court has indicated that it would uphold the Fed's independence, stating in a ruling in May that the Fed is uniquely independent while allowing Trump to fire two Democratic-appointed leaders of other independent agencies. The high court essentially carved out the Fed as an exception when it comes to the president firing members of an independent agency.

How do Powell and the Fed respond?

Powell and the Fed are facing yet another unprecedented act of presidential pressure from Trump, posing challenges to the bank at a key time for the U.S. economy.

In a Tuesday statement, the Fed pledged to abide by any ruling in the lawsuit Cook has vowed to file against Trump, but it did not weigh in on the dispute itself.

"I abide by the court, yeah," Trump said when asked about the Fed's response.

The battle between Trump and Cook comes just three weeks before the Fed's next Federal Open Market Committee (FOMC) meeting, at which officials will face a crucial decision about interest rates.

As a member of the Fed board, Cook is an automatic member of the FOMC, making her one of 12 officials responsible for setting interest rates. If Cook's status is not yet resolved, Powell could face pressure to bar her from the policy meeting and other key Fed initiatives.

"Those are real questions, and if there are impediments in her way to doing her job, then there's a chance that Fed independence is compromised without any real changes made to Lisa Cook's job title," said Callie Cox, chief market strategist at Ritholtz Wealth Management.

Several top Fed officials have faced investigations into their finances during Powell's chairmanship, and all were allowed to stay in their roles pending the results of those probes.

But Cook's situation differs in two distinct ways. 

While her former Fed colleagues faced accusations of violating the bank's own policies that first circulated in the media, Cook has been accused of committing a criminal offense by a top Trump official. 

Cook is the third high-ranking government official to face accusations of mortgage fraud from Pulte, who has thrown the independent financial regulator squarely behind the president's political agenda.

Until the courts weigh in, Powell and the Fed may be forced to decide whether defending Cook does more harm than good to the bank's efforts to protect its independence.

"Would Powell let the Fed let Cook stay in office as Governor, which might put the whole Fed and FOMC at risk? Or does he agree with her about drawing the line here?" Derek Tang, CEO and co-founder of research firm LHMeyer, wrote in a Tuesday analysis.

"It could make the White House paint a target on the whole system, and the situation could put the Fed on defense to explain to the general public why it is defying the will of a democratically-elected President."

How do markets react to the battle?

Despite the risks facing Fed independence, Wall Street brushed off the budding legal battle between Trump and Cook.

Stocks, bonds and the value of the dollar moved little Tuesday, with all three major stock indexes lingering near their opening levels.

The Dow Jones Industrial Average, S&P 500 and Nasdaq composite each closed roughly 0.4 percent higher on the day.

Cox said she was surprised by Wall Street's muted reaction given the serious implications of Trump's attempt to oust Cook, suggesting Wall Street may be waving it off after months of the president's unfulfilled threats to fire Powell. 

"Markets have been hammered with the threats to Fed independence before, and the thought now is that these threats are getting weaker and weaker," Cox said. "I don't necessarily agree with that," she continued.

While Wall Street may be used to Trump badgering Powell, it is unclear whether investors will stomach an actual legal battle between the president and a Fed board member.

Cook has vowed to fight Trump's attempt to fire her, igniting a high-stakes showdown with serious implications for the Fed's independence.

"You can't take a hammer to Fed independence over and over again and expect that institution to maintain its integrity," Cox said.