US President Donald Trump's year-long fight to exert greater control over the Federal Reserve will arrive at an unlikely destination: the Supreme Court.
Justices on the US high court on Wednesday are scheduled to hear arguments over Mr Trump's effort to fire Lisa Cook, one of the seven members on the Federal Reserve's Board of Governors.
In an unprecedented move last year, Mr Trump tried to sack Ms Cook, claiming she had engaged in mortgage fraud. Ms Cook has not been charged with any crime and denies the allegations.
If the Supreme Court sides with Mr Trump, it could give the President more influence over the Fed and, consequently, setting its benchmark interest rates.
Defining moment
The Federal Reserve Act of 1935 states a Fed official can only be fired “for cause”. The phrase has never been defined because no president before Mr Trump has attempted to fire a Fed official, although it is generally believed to mean malfeasance or neglect of duty, rather than a disagreement over policy.
David Wilcox, who previously led the Fed's research and statistics division, said that while the allegations against Ms Cook are “thin at best”, it is still unclear how the Supreme Court will define that phrase.
“If they grant that degree of discretion to the president, then the concept of independence is really a historical relic,” said Mr Wilcox, now a senior fellow at the Peterson Institute for International Economics and director of US economic research at Bloomberg Economics.
“We can kiss that goodbye, because at that point, the President would be empowered effectively to fire anybody with whom he had a disagreement, policy-related or otherwise.”
In legal documents, Ms Cook argues that Mr Trump's argument “would eviscerate the Federal Reserve’s independence”.
Pressure campaign
The Fed's refusal to bow to pressure from the White House to aggressively lower rates has infuriated the President.
Fed Chair Jerome Powell has pointed to the uncertainty over tariffs as a key reason for being on hold for much of 2025 before he steered the committee to cut rates in its final three meetings last year. Public remarks from influential Fed members indicate they are now on hold for the next few months.
“Over the past year, we've had a stringent test. It's like an engineering stress test of their design. And thus far, that design has survived remarkably well,” said Mr Wilcox.
But the stakes were raised even higher last week, when Mr Powell revealed he was under criminal investigation by the Justice Department over renovation costs at the central bank's headquarters. The mild-mannered Fed chief offered a forceful defence of the Fed’s independence and accused the inquiry as a pretext to pressure the central bank into cutting rates.
“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” Mr Powell said.
Mr Trump said he was unaware of the Justice Department's action against the Fed chairman.
Fresh obstacles
Still, the criminal inquiry complicates the process for Mr Trump to place a new leader on the Fed board, with Mr Powell's chairmanship scheduled to expire in May. Fed watchers believe it will be an uphill battle for Mr Powell's successor to distance themselves from the White House.
“Whoever it is that Trump picks, it will be viewed as a non-independent-pick,” said Derek Horstmeyer, a professor at George Mason University.
Fed officials serve staggered, 14-year terms that are meant to limit the number of appointments a president can make during their term to blunt political influence, although Fed officials rarely see out the duration of their tenure.
Analysts also believe that if the criminal inquiry was meant to intimidate Mr Powell to leave the board at end of his chairmanship, it could have had the opposite effect. Mr Powell can still serve out his remaining two years as Fed governor.
“That said, while an open investigation may increase the prospect of him staying, the more likely scenario remains that he steps down after his 14 years of service, in our view,” Wells Fargo economists wrote.
Markets anticipate that whoever takes Mr Powell's place will steer the Fed down a more dovish route. Traders believe the Fed will next cut rates in June, when the next Fed chair is presumably in place, according to CME Group data.
But economists also warn of case studies like Turkey, which has dealt with double-digit inflation and weak economic growth for a decade, as a consequence for bending to political pressure.
Mr Horstmeyer said that while Mr Trump may have the lower short-term rates he desires, it could also lead to higher inflation and higher long-term rates that affect borrowing costs like mortgages
“You get all of those in conjunction. So, Trump may not even want this. Lower short-term rates could just mean inflation again,” Mr Horstmeyer said.
