By Howard Schneider
WASHINGTON (Reuters) -Federal Reserve officials are preparing to gather on Tuesday for a two-day meeting amid rising concerns about the central bank's independence and uncertainty about the composition of its policy-setting committee, as President Donald Trump pushes ahead with a rushed effort to overhaul a pillar of the U.S. economy.
A federal appeals court is expected to rule on Monday on whether Fed Governor Lisa Cook can continue in her job while litigation over Trump's attempt
to fire her is pending, a ruling that could either upend the Fed's standing as an institution largely free from executive branch influence in setting monetary policy, or reaffirm it at least for now.
However the court rules, an immediate appeal to the U.S. Supreme Court is expected, adding a further complication to Cook's status for this week's policy meeting.
Meanwhile, the U.S. Senate is expected on Monday to confirm Stephen Miran, the head of the White House's Council of Economic Advisers, to an open seat on the Fed's seven-member Board of Governors, likely positioning the Trump nominee to be sworn in quickly and participate in this week's meeting as a voice sympathetic to administration calls for steep rate cuts.
Trump on Monday repeated that call, saying in a social media post in reference to Federal Reserve Chair Jerome Powell that he "MUST CUT INTEREST RATES, NOW, AND BIGGER THAN HE HAD IN MIND. HOUSING WILL SOAR!!!."
The Fed has been wary to cut rates because of inflation concerns, but it is expected at the conclusion of its meeting on Wednesday to lower its benchmark interest rate by a quarter of a percentage point to the 4.00%-4.25% range, as officials grow more worried about a sharp drop in job growth and rising unemployment.
More cuts may follow in October and December, but at a slower pace than Trump has demanded, with the president's call for a 1% Fed policy rate seen broadly by economists as out of step with what would be needed to keep inflation stable, absent a recession.
The Fed's policy decision, however, may be less a focus of the meeting than the expected arrival of Miran and the implications of the coming Cook decision on the central bank as an institution and the direction of U.S. monetary policy.
Trump will also be able to replace Powell when the Fed chief's term atop the central bank expires next May.
MIRAN'S APPROACH MAY REVEAL TRUMP'S PLANS
In a recent poll by Duke University's Department of Economics, 24 of 25 former Fed policymakers and staffers said they now saw an "elevated," "serious" or "extreme" risk that a blow to Fed independence will lead to monetary policy being set too loose and stoking higher inflation - the textbook result expected when elected officials gain sway over monetary policy.
If Miran's confirmation and swearing-in proceeds as expected, he will be able to vote on and dissent if he chooses on the Fed's rate decision this week, and submit a set of economic projections for inclusion in its "dot plot" of anticipated interest rate actions, a choice that could quickly show if he agrees with Trump's call for a 1% policy rate.
Indeed, Miran's approach to the job could offer a telling look at the Trump administration's plans for the central bank. Absent a board majority to approve any sweeping changes, Miran, whose term in theory only runs until January 31, may have his largest impact through how often and how intently he speaks publicly about monetary policy, the Fed's operations, the state of the economy, and things he thinks should change - even down to a Fed culture he has criticized sharply in past writings.
The fact that such issues are even being raised is, to some analysts, evidence of lost standing for the U.S. central bank, whose past insulation from White House influence has been a mainstay of global financial markets' trust in the dollar as a relatively risk-free benchmark.
"The longer the Fed stays in the political crosshairs, the higher the odds that the Fed's insulation from partisan politics erodes, diminishing a key cornerstone of effective monetary policy," said Christopher Hodge, chief U.S. economist at Natixis.
"Wednesday is going to come and Wednesday's going to go and it's going to look like all the other Fed meetings ...I don't think we are going to see fireworks," he said, adding that future policy gatherings could show growing divisions and "that's going to be a lot more telling about the dynamism of the FOMC (Federal Open Market Committee) in the coming meetings."
The Cook ruling is central to the discussion as well.
The Fed's authorizing legislation aims to keep Fed governors free of political influence in setting interest rates, an idea rooted in decades of central bank practice and case studies showing that when elected officials set interest rates bad outcomes - notably excessive inflation - typically follow.
Trump says Cook should be removed from the Fed board over allegations she made a false statement on a home mortgage application before she joined the board. Cook denies any wrongdoing and has not been charged with any offense.
The Fed had said earlier that it would follow any court ruling on Cook's status.
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
