The US Supreme Court will hear arguments on January 21 regarding Trump's attempt to remove Federal Reserve Governor Lisa Cook. The outcome of this case is not only about Cook's personal tenure but may also set a crucial judicial precedent for Trump's efforts to remove Powell.
The dispute between Trump and the Federal Reserve is set to reach a significant development at the Supreme Court next week.
As the Department of Justice continues its investigation into the Federal Reserve, the central bank’s fight to maintain political independence has shifted to its next battleground: the Supreme Court.
On January 21 local time, the Supreme Court will hold a hearing on arguments related to Trump's attempt to remove Federal Reserve Governor Lisa Cook.
Last year, US government officials accused Cook of mortgage fraud for allegedly misrepresenting her primary residence in a mortgage application. Trump had attempted to remove Cook, but his efforts have so far been blocked by the courts. If the White House prevails in this case, it would establish an important precedent for Trump's current attempts to remove Federal Reserve Chair Powell.
Bank of America economist Aditya Bhave wrote in a report: 'If the Supreme Court rules against Cook, it would significantly increase the likelihood that Powell could also be removed based on the Department of Justice investigation. We have always believed that the Cook case has more significant implications for policy direction than the selection of the next Federal Reserve Chair. We believe this point is now even clearer.'
The stakes were further raised in this Federal Reserve drama when Powell announced last Sunday that he had received a subpoena from the Department of Justice regarding the renovation of the Federal Reserve's Washington, DC headquarters. Reports indicate that the investigation focuses on whether Powell lied to Congress about the project during his testimony last year.
Trump has been a vocal critic of Powell and considered firing him last year. Powell insists that Trump has no authority to remove him, but the situation could change if Trump establishes legal justification.
On the surface, the effort to remove Powell appears theoretical: his term as chair ends in May, at which point Trump can freely nominate a new candidate. However, Powell's term on the Federal Reserve Board extends until 2028, meaning he could remain and potentially become an obstacle to Trump's push for the Fed to 'sharply!!!' cut interest rates, as he stated in a social media post on Tuesday.
However, this could also provide Powell with further motivation to complete his term as a governor, serving as a bulwark against Trump's attempts to undermine the Federal Reserve's independence from political manipulation.
As far as Powell is concerned, he has mostly refrained from commenting on Trump's criticisms, despite their occasional personal and sharp nature. While other presidents have also attempted to pressure the Federal Reserve into easing policy, Trump is unique in terms of both the public nature and aggressiveness of his approach. Moreover, this marks the first time the Department of Justice has pursued accountability against a sitting Federal Reserve Chair.
Long-term impact
Some analysts suggest that the current situation could evolve into a protracted struggle, and Powell may decide to remain in his position.
Deutsche Bank drew a parallel between Powell and former Federal Reserve Chair Marriner Eccles (whose name is now engraved on the Federal Reserve building). After being dismissed by President Harry Truman in 1948, Eccles chose to remain as a governor, serving until 1951 and continuing to advocate for central bank independence.
Moreover, within the Federal Open Market Committee (FOMC), which sets the Fed’s interest rates, there could even be a 'rebellion' in support of Powell remaining as chair, although Trump can nominate another individual to lead the central bank itself.
Deutsche Bank's Chief U.S. Economist Matthew Luzzetti wrote in a report to clients: 'While this has never been the baseline scenario and indeed seems relatively unlikely, the events of last weekend likely increased the probability that Powell will choose to stay at the Fed. In fact, if the administration presses forward with criminal charges against Chairman Powell and Senate Republicans steadfastly refuse to advance nominations to the Federal Reserve Board, the FOMC is very likely to opt to keep Powell as its chair.'
Regarding the hearing on the Cook case, if Trump prevails, he could use it as grounds to remove Powell. If Cook prevails, it would spark a prolonged battle of wills between the Federal Reserve and the White House, potentially leading to significant policy implications.
The market is looking for clues about the Fed's next moves, with traders widely betting that no action will be taken at this month’s policy meeting. According to CME Group data, they expect the next rate cut to occur only in June.
Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab, wrote: 'The ruling in the Cook case will carry significant weight for any president’s ability to shape the structure of the Federal Reserve. But make no mistake: while market reactions to Powell-related developments have been limited in scope, the direction of movement (a weaker dollar, falling stocks, and declining bonds) indicates how markets might absorb such a shock if it persists over the long term.'
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Editor/Doris