While the revelation by Jerome Powell on Sunday that he received a subpoena from the Department of Justice regarding the Fed headquarters renovation project caused an uproar, several Wall Street analysts point out that the Supreme Court hearing scheduled for January 21st is the true eye of the storm.
The court will then hear arguments regarding former President Trump's attempt to dismiss Federal Reserve Governor Lisa Cook. The ruling in this case will establish a crucial legal precedent: whether the White House can bypass the protections of the Federal Reserve Act "for cause" to forcibly remove Federal Reserve officials.
Aditya Bhave, an economist at Bank of America, stated bluntly in a report: "A ruling against Cook would significantly increase the likelihood of Powell being dismissed due to the DOJ investigation. We have consistently believed that the Cook case has greater implications for the policy trajectory than the choice of the next Fed Chair. We now believe this point is even more conclusive." He emphasized that the judgment in this case will become a litmus test for whether a president can reshape the structure of the Federal Reserve.
Markets are closely watching this development because if the defenses of the Fed's independence are breached, the logic of monetary policy formulation could shift from being "evidence-based" to "politically-based," posing a fundamental threat to long-term capital costs and asset pricing.
This development is directly impacting financial markets. According to CME Group data, traders have heavily bet that the Fed will take no action at its policy meeting later this month and have pushed back expectations for the first rate cut to June. Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab, pointed out that while the market's reaction to the Powell news was limited in magnitude, the direction was very clear—a decline in the dollar, stocks, and bonds—signaling how markets might digest this long-term risk if the shock persists.
The Supreme Court's "Crucial Battle": The Chain Reaction of the Cook Case For investors, next Tuesday, January 21st, is a date that must be circled on the calendar.
The core of that day's hearing revolves around the Trump administration's accusation that Lisa Cook misreported her primary residence on mortgage applications,涉嫌欺诈. Although Trump's previous attempt to remove her was blocked by a court, a White House victory in this case would clear the legal path for a president to dismiss Fed officials "for cause."
The Federal Reserve Act of 1913 stipulates that the president can only remove board members "for cause." Jenny Breen, an associate professor of law at Syracuse University, noted that while the Supreme Court has previously allowed presidents broader dismissal powers in other agencies, it has sought to insulate the Fed as a "structurally unique quasi-private entity." However, if the court sides with Trump this time, it would signify a further erosion of checks on executive power.
A Barron's commentary warned that investors are currently too complacent. If the court allows Cook's dismissal, it would make it easier for Trump to fire Powell using the investigation's findings as a rationale. The article pointed out: "If investors sense that Trump is gaining broad power to fire governors 'for cause,' this month could mark the beginning of the next bear market, or even a market crash."
The Long-Term Structural Risks Facing Markets The consequences of this legal battle extend far beyond short-term market volatility.
Barron's analysis suggests that if Trump wins the case and successfully "stacks" the Fed with loyalists, the worst-case scenario is that markets might cyclically tolerate a Fed composed of dovish loyalists, but would pay a heavier structural price when the economic cycle demands rate hikes and the new Fed refuses to act.
Kevin Gordon of Charles Schwab emphasized that the ruling in the Cook case "will carry enormous weight regarding any president's ability to shape the Fed's structure."
Jenny Breen believes that the investigation targeting Powell shows the administration feels "unbound by democratic norms," so any check from the Supreme Court would be positive. However, if the court fails to clearly uphold the Fed's independence, the only remaining constraint would be the market itself—halting further presidential intervention in the central bank through a dramatic market crash.
Powell's "Counterattack": Potentially Staying on as Governor to "Fight to the End" Ironically, the Trump administration's aggressive offensive could backfire.
According to CNBC, the investigation into Powell—focusing on whether he lied to Congress about the renovation project—might instead strengthen his resolve to remain on the Federal Reserve Board as a governor after his term as chair ends in May.
Powell's term as chair ends in May, but his term as a governor lasts until 2028. This means he could remain on the Federal Open Market Committee (FOMC), acting as an obstacle to Trump's attempts to push for "substantial" interest rate cuts.
Matthew Luzzetti, Chief US Economist at Deutsche Bank, stated in a client note: "While this has never been the base case, the events of this weekend may increase the probability that Powell chooses to stay at the Fed. In fact, if the administration insists on pursuing criminal charges against Chair Powell and Senate Republicans firmly refuse to advance nominations for Fed governors, the FOMC could very well see Powell continuing as chair."
According to Polymarket data, the probability of Powell remaining on the Fed Board after his chair term ends has surpassed 55%. Since last week, the odds of him leaving the Board by year-end have fallen from 70% to below 60%.
Powell himself hinted at this in a statement on Sunday: "I will continue to do the job for which the Senate confirmed me, with integrity and a commitment to serving the American people."
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