The ability of the U.S. Federal Reserve System (the Fed) to set interest rates independently, free from political interference—a cornerstone of American economic policy—is under severe threat this week due to a pivotal Supreme Court case concerning presidential power. Oral arguments in the case concerning Fed Governor Lisa Cook are scheduled for 10 a.m. Eastern Time. Cook is suing over President Donald Trump's attempt to remove her from the powerful Federal Reserve Board, based on unsubstantiated allegations of mortgage fraud. Trump alleges that Cook's claiming of two properties as primary residences—a practice that can secure more favorable loan terms—constitutes sufficient grounds for her dismissal. Appointed by former President Joe Biden, Cook is the first African American woman to serve on the Fed's Board of Governors and denies any wrongdoing. The U.S. Department of Justice is investigating the allegations, first raised by Trump allies, but has not filed any charges against Cook. However, the 1935 Federal Reserve Act stipulates that a president cannot remove a Federal Reserve Board member at will, except for "cause"—a term widely interpreted as negligence or malfeasance in office. A Supreme Court ruling in favor of Trump could sound the death knell for Fed independence, raising concerns not only about increased political interference in monetary policy but also triggering volatility in global financial markets. Such a decision would significantly lower the threshold for the White House to dismiss Fed officials who disagree with the president on monetary policy. "The single biggest, most immediate threat to the Fed right now is the Supreme Court. Full stop," said former Philadelphia Fed President Patrick Harker at a central banking forum last week. "In my view, if the Supreme Court rules against Cook, the Fed's independence is gone, because future presidents will use it as an opportunity to remove officials they disagree with." A ruling supporting Trump would also free up a seat on the Fed's Board of Governors, allowing him to nominate another person to fill the vacancy this year. Fed Chair Jerome Powell, named as a co-defendant in Cook's case, has decided to attend the oral arguments alongside the Fed's top lawyer—a move experts call an unusually strong show of support. U.S. Treasury Secretary Scott Bessent said on Tuesday that Powell's attendance was "a real mistake." The Cook case exemplifies the frustration of the Trump administration over its inability to control interest rates, a powerful economic tool managed by the central bank. During Trump's second term, he and his allies repeatedly pressured the Fed to accelerate the pace of interest rate cuts. After the Fed raised rates multiple times to combat inflation during the pandemic, Trump frequently attacked Chair Powell for not cutting rates to stimulate the economy, calling him "low IQ" and "clueless." Powell revealed last week that he is receiving a subpoena from the U.S. Department of Justice concerning his congressional testimony last year about the Fed's self-funded, $2.5 billion renovation of its Washington headquarters. Powell released an unusual video rebutting the allegations, calling the Justice Department's actions a pretext. "The Fed sets interest rates based on its own judgment of what best serves the public interest, not the preferences of the president, and the consequence is the threat of criminal prosecution," Powell said in a statement Sunday evening. The very architecture of the Federal Reserve is central to the independence of its monetary policy. The Fed's powerful interest-rate setting committee consists of 12 officials, seven of whom are appointed by the president to serve on the Board of Governors for 14-year, staggered terms. This long-term structure is designed to insulate the Fed from short-term political pressures. If the Supreme Court approves Cook's removal, it would set a precedent allowing Trump—and any future president—to reshape the Fed's Board, potentially forcing it to cut rates even when economic fundamentals do not support such a move. A Supreme Court ruling in the Cook case "will have a critical impact on the authority of presidents to shape the Fed's structure," wrote Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab, in an analysis last week. Economists widely agree that the Fed's model of making difficult interest rate decisions independently, based on economic data, has yielded tangible benefits for the American public. This stands in stark contrast to historical counterexamples, such as former Fed Chair Arthur Burns' close relationship with President Richard Nixon in the 1970s and early 1980s. Burns, who infamously did not raise rates despite clear signs of inflation ahead of a national election. The mistakes made by the Fed during that period exacerbated the difficult situation of high unemployment coupled with high inflation. Meanwhile, the central bank is bracing for another momentous personnel decision: Trump plans to announce his nominee for Fed Chair within the next two weeks. Powell's term as Chair expires on May 15, though his term as a Fed Governor lasts until 2028. Powell has not clarified whether he will leave the Fed entirely after his chairmanship ends. Also uncertain is whether Trump intends to keep Fed Governor Stephen Milan, whose term on the Board, which was interim, expires later this month. Leading contenders for the Fed Chair position include National Economic Council Director Kevin Hassett, former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, and Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income.
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