WASHINGTON (AP) — The Supreme Court on Monday said the Federal Reserve, unlike any other agency in Washington, has a measure of independence from the presidency and day-to-day politics. But the court didn't define to what extent.
The case is the latest round in an unprecedented fight between the Fed and President Donald Trump. More political interference at the Fed could upend financial markets around the world, which closely follow its interest rate
moves.
Trump has repeatedly demanded that the central bank cut its key interest rate to lower borrowing costs for homeowners, businesses, and even the government itself. Trump sought to fire a Fed governor, Lisa Cook, last August after accusing her of mortgage fraud — a charge she denies. Cook was appointed by former President Joe Biden and removing her would give Trump the opportunity to name a more amenable official in her place.
In a 5-4 decision, the court ruled that the president cannot fire the seven members of the Fed's board of governors without a clear cause. The decision endorses the Fed's independent structure even as the court eliminated such protections for leaders of other agencies, including the Federal Trade Commission, whom the president can fire at-will.
“That’s a big deal,” said Scott Alvarez, the central bank's former top lawyer. "That’s one of the things that makes the Fed independent.”
While the decision is a boost for the Fed, it does leave Cook vulnerable to further attempts by the Trump administration to fire her. Trump said on his social media site, Truth Social, that “we will take appropriate action immediately” to remove Cook. But for now, she will keep her job while the case is fought in lower courts.
Here is what the court decided, and why the Fed's independence matters.
In a separate case Monday, the justices ruled 6-3 that the Constitution allows the president to fire the heads of federal agencies that had previously been considered independent. But in the Cook case, the court carved out a clear exemption for the Fed.
The Fed has a “unique historical status and role,” Chief Justice John Roberts wrote, similar to the First and Second Banks of the United States that existed in the early 1800s and that operated “at a deliberate remove from the ordinary political process.”
If the president could fire a Fed governor for any reason, it would undermine that official's ability to make decisions independently, Roberts wrote.
“Nothing could be more corrosive of the independence that Congress sought to preserve,” the chief justice's opinion said.
Still, Kathryn Judge, a law professor at Columbia University, said the justices' decision to strike down the independence of other agencies erodes the Fed's standing by leaving it as the only remaining such body in Washington. The principle of independent, non-political judgment has been undercut, she added.
“Fed independence lives on for another day, but is not as robust as it was prior to these decisions," she said.
And the court did not fully close the door on Trump's efforts to fire Cook. Trump's lawyers accepted that Trump could only fire her “for cause,” but they argued that the White House could define the cause and it couldn't be second-guessed by courts.
The Supreme Court instead said that “for cause” likely involved serious misconduct that wasn't related to their professional duties, but didn't provide much detail. More importantly, they also threw out the higher standard that Cook's lawyers had pushed, which would have allowed governors to only be fired for inefficiency, neglect of duty, or malfeasance on the job. Since the alleged mortgage fraud occurred before she joined the Fed, such a standard would have likely shut down the case.
The court also said that Cook had to be given formal notice of her firing — the president only announced it last August on Truth Social — and an opportunity to formally respond, though the court did not specify what the process should look like. Indeed, Roberts included a footnote in his opinion noting that nothing forbids Trump from “trying again” to fire her, provided she is given proper notice and a chance to contest it.
Trump could seek to provide a bare-bones procedure while firing Cook again to bolster his case in the lower courts, legal experts said.
"That’s an area of vulnerability still for the Federal Reserve and for Lisa Cook,” Alvarez said.
The court battle will likely further define the boundaries of Fed independence.
The Fed wields extensive power over the U.S. economy. By cutting the short-term interest rate it controls — which it typically does when the economy falters — the Fed can make borrowing cheaper and encourage more spending, accelerating growth and hiring. When it raises the rate — which it does to cool the economy and combat inflation — it can weaken the economy and cause job losses.
Economists have long preferred independent central banks because they can more easily take unpopular steps to fight inflation, such as raise interest rates, which makes borrowing to buy a home, car, or appliances more expensive.
The importance of an independent Fed was cemented for most economists after the extended inflation spike of the 1970s and early 1980s. Former Fed Chair Arthur Burns has been widely blamed for allowing the painful inflation of that era to accelerate by succumbing to pressure from President Richard Nixon to keep rates low heading into the 1972 election. Nixon feared higher rates would cost him the election, which he won in a landslide.
Paul Volcker was eventually appointed chair of the Fed in 1979 by President Jimmy Carter, and he pushed the Fed's short-term rate to the stunningly high level of nearly 20%. (It is currently 3.6%.) The eye-popping rates triggered a sharp recession, pushed unemployment to nearly 11%, and spurred widespread protests.
Yet Volcker didn't flinch. By the mid-1980s, inflation had fallen back into the low single digits. Volcker's willingness to inflict pain on the economy to throttle inflation is seen by most economists as a key example of the value of an independent Fed.
Most investors prefer an independent Fed, partly because it typically manages inflation better without being influenced by politics, but also because its decisions are more predictable. A Fed swayed by politics would be harder to anticipate, and investors could demand higher yields on Treasurys before buying them. That would raise borrowing costs throughout the economy.
