Fed Governor Lisa Cook has initiated a historic lawsuit against President Trump over his effort to oust her, generating a legal ambiguity never seen before, threatening the independence of the central bank, and potentially redefining the governance of monetary policy. This landmark case is a battle between presidential power and legislative safeguards that seek to shield the Federal Reserve against political meddling, and the world market is on edge as the case moves to the Supreme Court.
Cook defies the Trump authority to remove
According to Al Jazeera, Federal Reserve Governor Lisa Cook has sued on the grounds that US President Donald Trump has no authority to expel her. The case was initiated on Thursday, 3 days following Trump’s posting of a letter stating that Cook had been fired from her job. Cook presents a case in the lawsuit in which she claims that Trump contravened a federal law in trying to push her out of her job.
Presidents can only dismiss a Federal Reserve governor under the Federal Reserve Act of 1913 based on cause, a very high standard typically interpreted to mean exceptional malfeasance or lack of fiduciary care. The suit filed by Cook will most likely find its way to the Supreme Court, where a conservative majority has at least indicated it will permit Trump to remove officials of other agencies.
But the court recently indicated that the Federal Reserve can be an exception to the proverb. The Supreme Court stated in May 2020 in the case Trump v Wilcox, that Federal Reserve governors are not like other federal employees, since the bank is a unique institution, a quasi-private organization that is heir to the unique history of the First and Second Banks of the United States.
Mortgage fraud claims are not legal
Salon reports that Trump has maintained that he has a reason to fire Cook from her job. In his August 25 letter, he charged Cook with having committed mortgage fraud in 2021, one year before she was a member of the governing body of the Federal Reserve. Cause does not, however, mean whatever Trump wants it to mean; the statutorily defined meaning of cause is inefficiency, neglect of duty, or malfeasance in office.
The Federal Reserve Act fails to specify the meaning of the term removal for cause” and also fails to provide any criterion or procedure for removal. Should the Fed succumb to the Trump regime, or any other political figure who would want to attach interest rates to their political platform, then the economy would suffer immensely. Uncertainty and falsely created interest rates would lead to increased volatility in the market, leading to decreased trust in U.S. assets by investors. 4.8%.
The courts endorse Fed independence
Salon reports that Cook is retaliating by using hard legal arguments. In a civil lawsuit filed on Aug. 28, she said that the attempted firing infringes on her due process rights and the Federal Reserve Act. Asking the court to grant an emergency injunction to prevent her from shooting and establish that she was a member of the board of directors of the Fed, the lawyers of Cook claimed that such action by the President is a direct attack on the 100-year-old independence of the Federal Reserve System.
The case that Lisa Cook filed against Trump is a life-and-death challenge to the independence of the Federal Reserve, and the possible consequences of that challenge stretch well beyond monetary policy to the very basis of presidential authority and institutional independence. Whether time-honored safeguards of central bank independence can endure pressure politics or not will be one of the most significant legal cases in the history of economic governance.