WASHINGTON (AP) — Federal Reserve Governor Lisa Cook has sued the Trump administration in an effort to overturn the president’s attempt to fire her, launching an unprecedented legal battle that could significantly reshape the Fed’s longstanding political independence.
The lawsuit seeks an injunction to block her firing and “confirm her status” as a member of the Fed's governing board.
The case could become a turning point for the 112-year old Federal Reserve, which was designed by Congress to be insulated from day-to-day political influence. Economists prefer independent central banks because they can more easily take unpopular measures, such as lifting interest rates to combat inflation, than elected officials can.
Many economists worry that if the Fed falls under the control of the White House, it will keep its key interest rate lower than justified by economic fundamentals to satisfy Trump's demands. That could allow inflation to rise more quickly and could also push up longer-term interest rates, such as those on mortgages and car loans. Investors may demand a higher yield to own bonds to offset greater inflation in the future, pushing up borrowing costs throughout the economy.
“If Cook wins, she stays in place and we achieve some semblance of stability," said Peter Conti-Brown, a professor of financial regulation at the University of Pennsylvania in a Substack post. "If she loses ... that’s the end of Fed independence as it has been constructed and reconstructed over 112 years.”
No president has sought to fire a Fed governor before until Trump posted a letter on media late Monday saying that Cook was fired. Trump said the reason for her removal were allegations that she committed mortgage fraud in 2021, before she was appointed to the board. Most observers expect the case to end up at the Supreme Court.
The Supreme Court has signaled that the president can’t fire Fed officials over policy differences, but can do so “for cause,” typically meaning misconduct or neglect of duty. Cook has not been charged with any crime.
The lawsuit, filed by Cook's lawyer Abbe David Lowell, argues that the allegations don't involve misconduct by Cook while in office and haven't been proven. Cook should also have been given a chance to answer the charges, the suit says.
"The unsubstantiated and unproven allegation that Governor Cook ‘potentially’ erred in filling out a mortgage form prior to her Senate confirmation—does not amount to 'cause,' the lawsuit says.
“Allowing the President to remove members of the Board over policy disagreements would also render illusory the Board’s independence,” the suit says.
The president’s decision comes as he has repeatedly attacked Fed Chair Jerome Powell and the other members of the Fed’s interest-rate setting committee for not cutting the short-term interest rate they control more quickly. It currently stands at 4.3%, after Fed policymakers reduced it by a full percentage point late last year. Trump has said he thinks it should be as low as 1.3%, a level that no Fed official and few economists support.
The suit argues that the allegations of mortgage fraud are simply a pretext to fire Cook because she hasn't voted to lower interest rates: “The mortgage allegations against her are pretextual, in order to effectuate her prompt removal and vacate a seat for President Trump to fill and forward his agenda to undermine the independence of the Federal Reserve.”
Powell signaled last week that the central bank was leaning toward cutting its rate at its next meeting Sept. 16-17. Still, it's likely that the Fed will cut its key rate more slowly than Trump wants, and perhaps to as low as 3.25% or so, higher than Trump would prefer.
If Trump can replace Cook, he may be able to gain a 4-3 majority on the Fed's governing board. Trump appointed two board members during his first term and has nominated a key White House economic adviser, Stephen Miran, to replace Adriana Kugler, another Fed governor who stepped down unexpectedly Aug. 1.
Trump has said he will only appoint people to the Fed who will support lower rates.
Christopher Rugaber, The Associated Press
