Supreme Court hearing reveals unease over threats to Fed independence

The looming Supreme Court decision about whether President Donald Trump can fire a Federal Reserve governor, Lisa Cook, has more at stake than whether she may stay on at the central bank.

As the justices signaled throughout oral arguments Wednesday, they are simultaneously grappling with a much more existential question about the independence of the Fed and how insulated it should be from the White House.

That fundamental issue arose repeatedly over a roughly two-hour hearing, as the Trump administration defended the president's decision to try to fire Cook "for cause." For a judicial body often fraught with division over Trump's sweeping claims to executive power, the Supreme Court found rare moments of unity in questioning the economic impact of the president's efforts to meddle with the Fed.

Just before the Supreme Court hearing, Trump reprised his attacks on the central bank and its reluctance to slash borrowing costs well beyond what many economists believe is warranted given the United States' economic strength. Speaking at the World Economic Forum in Davos, Switzerland, Trump lamented not having control over what policies officials pursued once they joined the institution.

That barb appeared to be directed at Jerome Powell, the Fed chair, whom Trump quickly soured on after elevating him to lead the central bank in his first term. Powell has refused to be cowed by the president's demands to lower borrowing costs, prompting his ire.

Earlier this month, the Justice Department sent grand jury subpoenas to Powell as part of a criminal investigation into his handling of renovations underway at the central bank's headquarters in Washington. Powell, in a blunt video message, said the legal inquiry was about coercing the Fed into cutting interest rates.

The president's explicit threats against the Fed were not mentioned during the hearing Wednesday. Yet the justices appeared cognizant of the enormity of the decision before them.

In an early exchange, Justice Amy Coney Barrett pressed D. John Sauer, the solicitor general, about warnings the justices had received in friends-of-the-court briefs from economists, who argued that allowing the president to fire Cook could cause a recession.

One of those briefs was signed by every living former chair of the Fed's Board of Governors - Alan Greenspan, Ben Bernanke and Janet Yellen - along with six former treasury secretaries and many other high-ranking former officials appointed by presidents of both parties. They said that allowing Cook's removal would "erode public confidence in the Fed's independence and threaten the long-term stability of our economy."

Sauer sought to downplay those risks Wednesday, pointing to the fact that financial markets did not collapse in the wake of Cook's ouster in August. He called it "a kind of natural experiment, so to speak."

But Barrett appeared unswayed. "I don't want to be responsible for quantifying that risk," she said. "I'm a judge, not an economist." She then mused about whether the presence of this risk counseled "caution on our part."

Barrett was joined by other justices who were focused on the economic consequence if the Fed's independence were to be eroded.

"We know that the independence of the agency is very important, and that that independence is harmed if we decide these issues too quickly, and with not due consideration," said Justice Sonia Sotomayor, adding that further legal review "makes the most sense to the public's confidence and to the world's confidence about the due process of law."

The Trump administration tried to frame the matter much differently. Pressed by Justice Ketanji Brown Jackson later about an adverse effect on the public, Sauer argued that the greatest threat would be for Cook to remain at the Fed.

"We assert grievous irreparable injury to the public perception to the Federal Reserve of allowing her to stay in office," he said.

Not all the justices seemed convinced. Later in the hearing, Justice Brett Kavanaugh repeatedly pressed Sauer to explain the "purpose" of Fed independence. Eventually, he raised the issue at the heart of his inquiry - the extent to which permitting the president to fire officials more easily "would weaken, if not shatter, the independence of the Federal Reserve."

"Thinking big picture, what goes around comes around," Kavanaugh later added. "History is a pretty good guide. Once these tools are unleashed, they are used by both sides, and usually more the second time around."

Graham Steele, a longtime financial regulation lawyer and a former Treasury Department official, said the justices' comments reflected "their concerns about the real-world stakes of central bank independence and the potential economic harm caused by excessive partisan influence over monetary policy."

Steele said he viewed it as a "positive for Governor Cook's argument because they signal an attentiveness to the fact that the stakes of the case are much bigger than just her seat on the board."

Kathryn Judge, a financial regulation expert at Columbia Law School, noted that concerns about a significant economic fallout were notably lacking in the legal fights that arose over Trump's moves to fire members of other independent agencies, such as the Federal Trade Commission and the National Labor Relations Board. In those hearings, the justices appeared much more worried about "the harm to the president that would arise from allowing somebody to stay in office," she said.

Judge said Wednesday's hearing was a "good day for Governor Cook."

"It would be the shock of my legal career if Donald Trump wins this right now," said Peter Conti-Brown, an expert on Fed governance at the University of Pennsylvania. "The Supreme Court views Fed independence as central to the vitality of the United States."

Removal protection is seen as one of the most important guardrails bolstering the Fed's independence. By limiting the president's ability to remove officials for any stated reason, Congress sought to reduce the likelihood that the president could retaliate on the Fed if it pursued policy settings that went against the White House's wishes.

Kush Desai, a White House spokesperson, said in a statement Wednesday that the administration had satisfied the burden under law to seek Cook's removal.

"The removal of a governor for cause improves the Federal Reserve Board's accountability and credibility for both the markets and American people," he said.

Trump has openly vied for a majority of supporters on the Fed's board so that he can have more sway over the institution. Already, Trump has had the opportunity to fill one vacancy with a top economic adviser, Stephen Miran, who, since joining the Fed in September, has called for substantially lower rates.

The president is also in the process of picking his replacement for Fed chair. Powell's term as head of the central bank ends in May, although his term as a governor runs through 2028. Trump has insisted that his next Fed chair must mirror his thinking in seeking swift and steep reductions in rates, even going so far as to say last month that "Anybody that disagrees with me will never be the Fed Chairman!"

Daniel K. Tarullo, a former Fed governor who was a signatory on one of the friends-of-the-court briefs, said this broader context only underscored just how important the Supreme Court's decision would be.

"The Supreme Court justices read the papers, they know what's going on," said Tarullo, adding that they appeared uncomfortable with the idea that a president had full discretion to determine what constituted cause for removal.

"The independence of the Fed surely is at stake here depending on the way that the Court decides," he said.

This article originally appeared in The New York Times.