Supreme Court sharply critical of Trump moves on Fed, likely to keep Lisa Cook on job for now

The Supreme Court on Wednesday sharply questioned President Donald Trump's assertion of unchecked power to remove a member of the Federal Reserve over the mere allegation of gross negligence and without any opportunity for a hearing to dispute the claims.

A majority of justices also appeared likely to deny Trump's request to immediately remove Lisa Cook from her position as litigation continues, though it was less clear whether the court would definitively weigh in on the substance of the allegations or the proper standard for removal under the law.

The case, which comes as Trump mounts an unprecedented campaign to control the Fed, is being closely watched by financial markets around the world, as the independence of the central bank -- which sets policies affecting the global economy and every American business and consumer -- could hinge on the outcome.

Unhappy with the Fed's position on interest rates, Trump moved to fire Governor Lisa Cook, a Democratic-appointee, in August after members of his administration raised unproven allegations of mortgage fraud they said happened prior to her taking office. Cook denies the claims, though she has acknowledged through an attorney of making an "inadvertent" mistake on bank application paperwork.

At the heart of the dispute is what constitutes "cause," who decides that, and whether the president owes Cook a formal opportunity to defend herself in a hearing prior to removal. She has not been charged with a crime.

"Is it grossly negligent to make a mistake on a mortgage application?" asked Justice Sonia Sotomayor. "I don't know that gross negligence has ever risen to the level of a mistake."

No president in the central bank's 113 history has ever attempted to remove a member of the governing board, which Congress designed to be insulated from White House control in the interest of financial stability and global credibility.

Trump has claimed there is "sufficient evidence" that Cook illegally filed a mortgage application for a second home as a "primary" residence in an effort to secure more favorable loan terms, at the very least creating an impression of impropriety. The Justice Department has opened a criminal investigation. Cook, who refused to resign, insists through her attorneys that relying on "one stray reference" in a 2021 mortgage document amounts to pretext for a politically-motivated effort to manipulate the Fed’s policy board.

With Cook looking on from the court's gallery, along with Federal Reserve chairman Jerome Powell and former chairman Ben Bernanke, the justices pressed Trump Solicitor General John Sauer on the case against her, what discretion the president has to determine a cause for removal, and why a formal hearing should not be required.

"The governors set interest rates for ordinary Americans all across the country. And, here, there's the appearance of having played fast and loose or at least been grossly negligent in getting favorable interest rates for herself," Sauer told the court.

Chief Justice John Roberts appeared skeptical of the administration claims. "You began talking about deceit," he asked Sauer, "Does what you said after that apply in the case of an inadvertent mistake contradicted by other documents in the record?" Roberts appeared to be alluding to Cook's defense that other bank paperwork properly indicated her second mortgage was for a vacation home.

"This is deceit or at least it's gross negligence," Sauer replied. "It's the sort of inadvertent notation that people could be indicted for or at least the federal regulators would force you to buy back your loans."

Justice Brett Kavanaugh, often a key vote in close cases, seemed highly concerned about preserving the Fed's independence.

"Your position that there's no judicial review, no process required, no remedy available, a very low bar for cause that the president alone determines, I mean, that would weaken if not shatter, the independence of the Federal Reserve," Kavanaugh told Sauer.

"What goes around comes around," Kavanaugh continued. "All of the current president's appointees would likely be removed for cause on Jan. 20th, 2029, if there's a Democratic president, or January 20th, 2033, and then we're really at at-will removal. So, what are we doing here? ... History is a pretty good guide. Once these tools are unleashed, they are used by both sides, and usually more the second time around."

Kavanaugh went on to observe that Trump's claim of ultimate discretion could "incentivize" future presidents to dig up "trivial or inconsequential or old allegations difficult to disprove" and simply terminate a disfavored governor.

Several justices suggested that at the very least, the court should remand the case back to lower courts to continue proceedings to establish the facts.

"No court has ever explored those facts," Justice Samuel Alito noted. "Are the mortgage applications even in the record in this case?"

"If there isn't anything to fear from a hearing and if you have the evidence," Justice Amy Coney Barrett told Sauer, "why couldn't [government] resources have been put into a hearing?"

"It's our position that adequate process was already provided," Sauer replied. Trump posted a letter purporting to fire Cook on his Truth Social account and five days later wanted her off the job.

The case was being examined by the court in a very preliminary posture, focusing primarily on Trump's request to stay a lower court order that Cook be allowed to remain on the job. No lower court has thoroughly considered the legal or constitutional issues connected to the dispute.

Legal experts said it's possible the court could simply reject Trump's immediate claim -- allowing Cook to remain in place on grounds that she received insufficient due process and that the president does not suffer irreparable harm in the meantime. Litigation would continue, and likely make its way back to the high court in months to years.

Some justices, however, suggested it might be more prudent to resolve the case more substantively in the interest of providing certainty to economic markets.

"There's no rational reason to go through all the trouble of creating this unique quasi-private entity [as Congress did] that is exempt from everything from the appropriations process to the civil service laws just to give it a removal restriction that is as toothless as the president imagines," said Cook attorney and former U.S. Solicitor General Paul Clement.

"There is simply no reason to abandon over 100 years of central bank independence on an emergency application on a preliminary record" he said.

Former top leaders of the Fed and many leading economists have warned that if the president succeeds in firing Cook in this manner, it would erode public confidence in the Fed, undermine the effectiveness of its policies, and unsettle financial markets.

Trump has made clear he wants the Fed to more quickly lower interest rates and has sharply criticized Fed Chairman Powell, a Trump appointee, for failing to lead the way. Earlier this month, the Justice Department opened a criminal investigation into Powell, which he called blatant political pressure.

"Making sure that the Fed has the ability to access credible data, to be able to use expertise to analyze that data in a way that is best in class, and having the time to be able to affect policy that may take a time over months or even quarters or years -- this is all imperative for having that economy that moves towards full employment and price stability," said Heather Boushey, a research economist at Harvard University and a former White House economic adviser to President Joe Biden.

A majority of current Fed Board members have acted cautiously on interest rates over long-term inflation concerns. If Trump were able to replace Cook, he would potentially be able to bend the consensus view of the board to his will, though some Senate Republicans have vowed a critical vetting of any future nominee.

Cook was appointed to a 14-year term in 2022 by President Biden and is the first Black woman ever to serve on the central bank’s advisory committee.

WHAT IS KNOWN ABOUT THE ALLEGATIONS

The allegations of "gross negligence" that Trump has lodged against Cook center on two mortgages she holds for personal residences in Michigan and Georgia.

Cook was raised in Milledgeville, Georgia, and studied economics in Michigan, where she also later taught as a professor.

A mortgage filed in Washtenaw County, Michigan, on June 18, 2021, shows a $203,000 home loan secured by Lisa D. Cook. Fulton County, Georgia, public records show Lisa D. Cook also holds a $540,000 home loan registered on July 2, 2021 from the BankFund Credit Union. Both were recorded using the Uniform Home Loan Application. Trump and other administration officials claim she misrepresented her residency status on applications for those home loans, improperly claiming both as her "primary residence."

Cook, through her attorney, has acknowledged one application incorrectly indicated “primary” residence but insists it was a harmless mistake, no advantage was gained, and that it was contradicted by related documents which correctly identified the property.

"At the core of the referrals and allegations of wrongdoing is a fundamental misconception and purposeful omission," Cook's attorneys wrote in a letter to Attorney General Pam Bondi.

Providing false or inaccurate information on a mortgage application can be considered fraud, as banks rely on that data to determine risk and set financing rates for borrowers. Mortgages for primary residences typically receive lower rates than for second homes or rental properties.

But showing criminal intent is key to a successful fraud claim, legal analysts say. No criminal charges have been brought by federal authorities. None of the financial institutions providing Cook’s home loans have raised claims of possible fraud.

WHAT HAVE COURTS SAID

In a 2-1 decision in September, the U.S. Court of Appeals for the District of Columbia affirmed a lower court ruling that Cook was unlawfully terminated from her position.

Appellate Judges Brad Garcia and J. Michelle Child -- both Biden appointees -- agreed that Cook’s due process rights were violated when Trump fired her without allowing her any opportunity to challenge the decision. They added that lifting the lower court’s order -- allowing the immediate removal of Cook -- could have a "disruptive effect" on the Federal Reserve.

In his dissent, Judge Gregory Katsas, a Trump appointee, argued that Trump's attempt to remove Cook for cause was lawful and that her due process rights were not violated. Katsas said that Trump should have the power to remove Cook if her continued service "would enable a potentially compromised Governor to engage in significant governmental action -- such as voting on whether to adjust interest rates."

While the Supreme Court has endorsed broad presidential power to remove members of independent agencies that exercise executive power -- like the Federal Trade Commission, Merit Systems Protection Board, National Labor Relations Board, and Consumer Product Safety Commission -- the conservative majority of justices has also made clear that the Fed is different."

The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States, the court wrote in an unsigned May opinion that allowed Trump to terminate Democratically-appointed members of the MSPB and NLRB.

What that may mean for the Cook case remains unclear.

"If the court embraces any of the president's arguments here," said Menand, "I think we very rapidly end up in a situation where President Trump takes control of the board and the board more or less comes under the thumb of the White House. That obviously has implications for monetary policy."

A decision in the case is expected by the end of June.