Fed’s independence remains at risk despite temporary legal victory

Lisa Cook notched a temporary win in her legal battle against President Donald Trump this week when the Supreme Court said she could remain a governor on the Federal Reserve Board.

But the threat to the Fed's long-standing independence will continue to loom large over the central bank for at least the next several months.

The Supreme Court on Wednesday allowed Cook to remain in her job while her lawsuit against Trump proceeds. The president, who has tried to gain more control over the Fed, tried to fire her over unproven allegations of mortgage fraud.

Still, the decision - part of a two-sentence, unsigned order - fell short of a decisive victory for the central bank. Instead, the court agreed to wait to rule on Cook's status until after it hears arguments on the matter in January.

"It's a time to exhale but not breathe easy," said Peter Conti-Brown, an expert on Fed governance at the University of Pennsylvania. "The wrecking ball that the Trump administration has been wielding through the administrative state just hit a brick wall that it could not crumble." Conti-Brown warned, however, that the issue was far from resolved.

Trump has accused Cook of committing mortgage fraud, citing that as justification to fire her. Under the Federal Reserve Act of 1913, the president can remove a Fed official only "for cause" - which has typically meant gross malfeasance or a neglect of duty while serving in the job. Congress put that safeguard in place to ensure that the Fed was protected from undue meddling by the president.

Cook, who has not been charged with a crime, has argued that the Trump administration's allegations are "flimsy" and "unproven." She has also said Trump did not give her ample time to rebut them before he fired her.

It is not the first time Trump has taken aim at the country's independent agencies. But the order Wednesday reaffirmed that the Supreme Court views the Fed as a distinct one.

This year, the court granted the president the ability to remove leaders of independent institutions like the Federal Trade Commission and the National Labor Relations Board while the cases are being litigated. Trump fired Democratic officials from those two agencies purely because of policy differences, something previous court rulings barred.

Jeremy Kress, a law professor at the University of Michigan who previously worked as a lawyer at the Fed, said the court's move gave him more confidence that the justices would eventually side with Cook. Still, he cautioned against reading too much into what he described as an "unexplained procedural order."

"Without a substantive rationale for why the Fed should be treated differently from the FTC or NLRB, today's decision may simply be a temporary reprieve while the court considers how much control to give the president over the administrative state," he said. "Until the court rules on the merits, Fed independence remains very much in jeopardy."

How the court ends up ruling will have sweeping ramifications for the central bank, whose independence has formed the backbone of the world's largest economy and most important financial system.

If the court sides with Cook, the threat to the Fed's independence will be significantly lessened but not eradicated. One concern was that in ousting Cook, Trump would have an immediate vacancy to fill on the board with another loyalist.

Already, he has been able to fill a spot that opened up unexpectedly in August after Adriana Kugler stepped down several months before her term expired. His pick to replace her, Stephen Miran, who is taking only a temporary leave of absence from the White House, has already made an impact in his short tenure at the Fed. He dissented when the central bank voted last month to lower interest rates by a quarter of a percentage point, instead favoring a half-point move. He has also spoken out repeatedly about the need for substantially lower borrowing costs.

Trump has openly vied to have a majority of supporters on the seven-person board, which would give him greater influence over interest rates, policies related to Wall Street and the inner workings of the Fed.

The board must also vote every five years on the reappointment of all 12 regional Fed bank presidents. The next deadline is at the end of February, adding yet more urgency to the president's desire to gain control of the board by then. Trump will also get to select a replacement for Fed Chair Jerome Powell, whose term expires in May.

"The president gets to appoint governors and the Fed chair with the advice and consent of the Senate, so over the long term, he can still shape the central bank as vacancies come up," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics who was formerly the chief economist at the International Monetary Fund.

But if the Supreme Court sides with Trump after hearing the case in January, the president and his successors will have a more open path to remove Fed officials.

Last week, every living former chair of the Fed joined other leading economists in a friend-of-the-court brief that suggested that enabling Trump to remove Cook would "expose the Federal Reserve to political influences, thereby eroding public confidence in the Fed's independence and jeopardizing the credibility and efficacy of U.S. monetary policy."

Keeping Cook in place while the underlying legal questions are in flux would "serve the public's interest by safeguarding the independence and stability of the system that governs monetary policy in this country," they wrote - an argument that her lawyers have also promoted.

"For the United States' democracy, it's the right call," Kenneth Rogoff, a Harvard University economist who signed the brief, said of the court's decision Wednesday. "You need an independent Fed with a strong anti-inflation bias in order to preserve economic and market stability."

This article originally appeared in The New York Times.