A high court decided on Monday that Lisa Cook will continue as a member of the Federal Reserve, countering President Donald Trump's attempts to dismiss her shortly before an important decision on interest rates.
The Trump administration is anticipated to promptly approach the Supreme Court in a final attempt to remove Cook. The Federal Reserve's upcoming two-day meeting, aimed at deciding its next interest rate action, will start on Tuesday morning. Additionally, Cook's legal case to permanently prevent her termination still needs to progress through the judicial system.
The White House's effort to replace Cook represents an extraordinary attempt to alter the Fed's seven-member leadership, which was intended to remain largely separate from political influences. No president has ever removed a current Fed governor throughout the agency's 112-year history.
In addition, Senate Republicans on Monday approved Stephen Miran, Trump's candidate for a vacant position on the Federal Reserve's board. Assuming there is no unexpected action from the Supreme Court, the Fed's interest rate decision-making body will convene on Tuesday and Wednesday, consisting of all seven governors along with the 12 regional bank presidents.
Out of the 19 officials, twelve will be involved in deciding the adjustment of the central bank's short-term interest rate: This includes all seven governors and five regional presidents, who take turns casting their votes.
Chair Jerome Powell indicated in a prominent speech last month that the Federal Reserve is expected to reduce its main interest rate during this meeting, from approximately 4.3% to 4.1%. Additional borrowing expenses, like mortgage rates and auto loans, have already dropped in anticipation of the reduction and may decrease further.
Accusations of mortgage fraud
On 25 August, Trump attempted to dismiss Cook, but a federal judge recently determined that the dismissal was unlawful and ordered her return to the Fed's board. Trump's appointee, Bill Pulte, has alleged that Cook committed mortgage fraud by listing two properties as "primary residences" in July 2021, prior to her appointment to the board. These types of claims can result in a reduced mortgage rate and a smaller down payment compared to if one of the properties had been classified as a rental or second home. Cook has rejected these allegations.
In a 2-1 ruling, the appellate court determined that Cook's right to due process was breached as the administration failed to provide her with a structured chance to address the allegations.
Several legal experts view the effort to dismiss Cook as a risk that could undermine the Fed's long-standing political autonomy. Economists favor independent central banks since they are better positioned to implement difficult decisions, such as increasing interest rates to manage inflation, without the constraints faced by elected officials.
Several economists are concerned that if the Federal Reserve comes under the influence of the White House, it might maintain its main interest rate at a level lower than what economic conditions warrant, in response to Trump's push for more affordable borrowing. This could lead to increased inflation and might also cause longer-term interest rates, like those for mortgages and auto loans, to rise. Investors could ask for a higher return on bonds to compensate for potential future inflation, which would increase borrowing costs for the U.S. government and the overall economy.
Miran will be part of the Fed board
In addition, Miran leads the White House's Council of Economic Advisers and mentioned earlier this month that he will take a leave of absence without pay but will continue his role while joining the Fed's board. This will mark the first time in several decades that someone from the executive branch holds a position at the Fed.
Miran has been assigned to complete a term that ends in January, but he may continue holding the position if no successor is selected.
Cook has denied any misconduct and has not faced criminal charges. According to documents acquired by The Associated Press, Cook stated that her Atlanta condominium would be a "vacation home," as noted in a loan estimate she received in May 2021. Additionally, in a form requesting a security clearance, she referred to it as a "second home." Both documents seem to challenge the administration's allegations of fraud.
Last week, US District Court Judge Jia Cobb determined that the administration had failed to meet a legal condition stating that Federal Reserve governors can only be removed "for cause," which she clarified refers exclusively to improper behavior during their tenure. Cook became a member of the Fed's board in 2022.
In their urgent request, Trump's legal team stated that regardless of when the actions took place before her tenure as governor, her supposed behavior "undoubtedly raises doubts about Cook's reliability and whether she can effectively manage interest rates and the economy."
Trump has consistently criticized Powell and the rest of the Fed's interest-rate committee for not reducing the short-term interest rate under their control at a faster pace. Trump has expressed his belief that the rate should be as low as 1.3%, a figure that is not backed by any Fed official or most economists.
Cook is the first African American woman to hold the position of Fed governor. She was a Marshall Scholar and earned her degrees from Oxford University and Spelman College. Before becoming a member of the board, she taught at Michigan State University and the Kennedy School of Government at Harvard University.