By David Lawder
WASHINGTON, Jan 21 (Reuters) - The two people with the most at stake in how the U.S. Supreme Court rules on whether President Donald Trump can legally fire a Federal Reserve governor sat through two hours of arguments on Wednesday over what constitutes "cause" for dismissal and other issues central to the future of the central bank's independence.
Fed Governor Lisa Cook, whose firing Trump announced in a social media post last August over unproven allegations of mortgage fraud, was
joined in the court's ornate chamber by central bank Chair Jerome Powell, a notable show of support for his junior colleague even as Trump's Justice Department targets him in a separate criminal investigation.
Powell defied a warning from Treasury Secretary Scott Bessent not to attend, even though Bessent attended Supreme Court arguments over Trump's tariffs last November.
Cook and Powell, seated in separate rows, were perhaps the most notable attendees in the packed courtroom.
Current Fed Governor Michael Barr and former Fed Chair Ben Bernanke also attended in a show of support for Fed independence, which economists fear would be weakened if the court grants Trump the right to fire Cook immediately while her legal challenge to her ouster plays out.
"This case is about whether the Federal Reserve will set key interest rates guided by evidence and independent judgment or will succumb to political pressure," Cook said in a statement issued following the arguments.
"Research and experience show that Federal Reserve independence is essential to fulfilling the congressional mandate of price stability and maximum employment. That is why Congress chose to insulate the Federal Reserve from political threats, while holding it accountable for delivering on that mandate," Cook added.
Cook departed in a black SUV without speaking to reporters.
The Federal Reserve Act, the law that set up the central bank in 1913, included provisions meant to insulate it from political interference, allowing governors to be removed by a president only "for cause," though the law does not define the term nor establish procedures for removal.
During the arguments, conservative and liberal justices asked about whether acts prior to an official's time in office should be off limits and whether negligence rises to a firing offense under the Federal Reserve Act's language on "cause."
Conservative Justice Samuel Alito, for example, asked what should happen if a current Fed official is seen in a video from before taking office expressing admiration for Adolf Hitler or the Ku Klux Klan.
"I'm going to say that's an official that would be impeached in a heartbeat," Paul Clement, the lawyer arguing for Cook, said in responding to the Klan hypothetical. "And the fact that they would be impeached in a heartbeat is going to cause them to resign in half a heartbeat."
DECEIT OR INADVERTENT MISTAKE?
The Republican president has attempted to fire Cook over allegations that she falsely claimed two separate properties as her primary residence in order to secure lower mortgage rates. Cook denies the allegations and has said she submitted papers identifying one of the properties as a "vacation home" - all prior to her nomination as a Fed governor in 2022 by Democratic former President Joe Biden.
Solicitor General D. John Sauer, arguing for the Trump administration, characterized the submissions as "deceit or gross negligence."
Clement argued that Cook should have been given notice of the allegations, with a hearing for her to present evidence to the contrary and the ability for judicial review of the decision - common elements of another legal standard for firings called INM, short for inefficiency, neglect of duty and malfeasance in office.
Conservative Chief Justice John Roberts questioned why there would even need to be a hearing in Cook's circumstances: "You have one sentence to say: it was an inadvertent mistake."
Clement told the justices, "We think this was at most
an inadvertent mistake."
Outside the court, congressional Democrats held a rally for Fed independence before the arguments. Representative Maxine Waters, the top Democrat on the House of Representatives Financial Services Committee, said Trump has targeted Cook because he wants a central bank that answers only to him.
"Make no mistake," Waters said, "this is about power and control."
(Reporting by David Lawder;Editing by Dan Burns and Will Dunham)
