By Daniel Wiessner and Jan Wolfe
(Reuters) -A U.S. appeals court declined on Monday to allow Donald Trump to fire Federal Reserve Governor Lisa Cook - the first time a president has pursued such action since the central bank's founding in 1913 - in the latest step in a legal battle that threatens the Fed's longstanding independence.
The decision by the U.S. Court of Appeals for the District of Columbia Circuit means that Cook can for now remain at the Fed ahead of its policy meeting on Tuesday and
Wednesday where it is expected to cut U.S. interest rates to shore up a cooling labor market.
The D.C. Circuit denied the Justice Department's request to put on hold a judge's order temporarily blocking the Republican president from removing Cook, an appointee of Democratic former President Joe Biden. The administration is expected to appeal the ruling to the U.S. Supreme Court.
U.S. District Judge Jia Cobb ruled on September 9 that Trump's claims that Cook committed mortgage fraud before taking office, which Cook denies, likely were not sufficient grounds for removal under the law that created the Fed.
In setting up the Fed, Congress included provisions to shield the central bank from political interference. Under the law that created the Fed, its governors may be removed by a president only "for cause," though the law does not define the term nor establish procedures for removal. No president has ever removed a Fed governor, and the law has never been tested in court.
Cook, the first Black woman to serve as a Fed governor, sued Trump and the Fed in late August. Cook has said the claims did not give Trump the legal authority to remove her and were a pretext to fire her for her monetary policy stance.
The Trump administration has argued that the president has broad discretion to determine when it is necessary to remove a Fed governor, and that courts lack the power to review those decisions.
The case has ramifications for the Fed's ability to set interest rates without regard to the wishes of politicians, widely seen as critical to any central bank's ability to function independently to carry out tasks such as keeping inflation under control.
Trump this year has demanded that the Fed cut rates aggressively, berating Fed Chair Jerome Powell for his stewardship over monetary policy. The Fed, focusing on fighting inflation, has not done so, though it is expected this week to make a cut.
The three-judge D.C. Circuit panel that made the decision included two appointed by Biden, Judges Michelle Childs and Brad Garcia, and one appointed by Trump, Judge Gregory Katsas.
Childs has ruled against the Trump administration in several cases in recent months including a September 10 decision that reinstated the director of the U.S. Copyright Office after Trump fired her. Katsas has voted in appellate rulings in favor of Trump policies in numerous cases including challenges to a freeze on foreign aid and the dismantling of a consumer protection agency.
The Supreme Court this year has allowed Trump to proceed with the removal of various officials serving on federal agencies that had been established by Congress as independent from direct presidential control. But in a May order in a case involving Trump's dismissal of two Democratic members of federal labor boards, the Supreme Court signaled that it views the Fed as distinct from other executive branch agencies. It said the Fed "is a uniquely structured, quasi-private entity" with a singular historical tradition.
The Trump administration in a court filing on Thursday had asked the D.C. Circuit to move quickly so that Trump could remove Cook before the Fed's policy meeting on Tuesday and Wednesday. Administration lawyers said that allowing the president to fire Cook would "strengthen, not diminish, the Federal Reserve’s integrity."
Cook's lawyers in a filing in response said removing Cook ahead of the meeting would impact U.S. and foreign markets, and that the public interest in keeping her in office outweighed Trump's efforts to take control of the Fed.
In blocking Cook's removal, the judge found that the "best reading" of the 1913 law is that it only allows a Fed governor to be removed for misconduct while in office. The mortgage fraud claims against Cook all relate to actions she took prior to her U.S. Senate confirmation in 2022.
Trump and his appointee William Pulte, the Federal Housing Finance Agency director, have claimed that Cook inaccurately described three separate properties on mortgage applications, which could have allowed her to obtain lower interest rates and tax credits.
A loan estimate for an Atlanta home purchased by Cook shows that she had declared the property as a "vacation home," according to a document reviewed by Reuters, information that would appear to undercut the allegations against her. And the property tax authority in Ann Arbor, Michigan, said in response to a Reuters inquiry that Cook has not broken rules for tax breaks on a home there that Cook had declared her primary residence.
The finding, which came in response to a Reuters request that the city review Cook’s property records, could boost Cook’s defense against efforts by the Trump administration to remove her from the Federal Reserve board.
Trump's Justice Department also has launched a criminal mortgage fraud probe into Cook, and has issued grand jury subpoenas out of both Georgia and Michigan, according to documents seen by Reuters and a source familiar with the matter.
(Reporting by Daniel Wiessner in Albany, New York and Ann Saphir; Editing by Alexia Garamfalvi and Will Dunham)
