By Andrew Chung, John Kruzel and David Lawder
WASHINGTON, Jan 21 (Reuters) – Conservative and liberal justices on the U.S. Supreme Court on Wednesday expressed skepticism about President Donald Trump’s bid to oust Federal Reserve Governor Lisa Cook in a case where the central bank’s independence is at stake.
During about two hours of arguments in the case, the justices indicated they were unlikely to grant the Trump administration’s request to lift a judge’s ruling barring the Republican president from immediately firing Cook while her appeal continues.
Some of the justices pressed D. John Sauer, the U.S. attorney general who advocates for the Trump administration, about why Cook was not given a chance to formally respond to the unproven mortgage fraud allegations — which she denied — that the president cited as justification for removing Cook. They also expressed concerns about the effect on the economy of such a first-ever central bank presidential dismissal and the implications for the Fed’s prized independence from political influence.
The case is the latest dispute to reach the US’s highest court involving Trump’s expanded view of presidential powers since returning to office 12 months ago.
When the court, which has a 6-3 conservative majority, agreed in October to hear the case, they left Cook in her job for now.
“This case is about whether the Federal Reserve will set interest rates guided by evidence and independent judgment or bow to political pressure,” Cook, who participated in the arguments, said in a later statement.
“As long as I serve at the Federal Reserve, I will uphold the principle of political independence in the service of the American people,” Cook added.
“fraud or gross negligence”
Sauer told the justices that the allegations against Cook challenge his “conduct, fitness, ability or competence to serve as a governor of the Federal Reserve.”
“The American people should not have their interest rates set by someone who, at best, has been grossly negligent in obtaining favorable interest rates for herself,” Sauer said.
“Deception or gross negligence on the part of a financial regulator in financial transactions is grounds for removal,” Sauer added, arguing that the allegations warrant immediate removal.
Cook has called the allegations against her a pretext to fire her over monetary policy differences, while Trump is pressuring the central bank to cut interest rates and blaming Fed Chairman Jerome Powell for not doing so sooner.
Conservative Chief Justice John Roberts asked Sauer to explain whether his argument that Cook should be removed immediately applies if the basis of the mortgage allegations — that she listed two different properties as her primary residence — is an “inadvertent mistake contradicted by other documents in the record.”
Sauer responded that even if Cook made a mistake on the mortgage paper, “it’s a pretty big mistake.”
Roberts seemed skeptical, telling Sauer “we can debate that.”
Paul Clement, Cook’s defense attorney, told jurors that the charges against Cook stemmed from “at most an accidental mistake” regarding a mortgage application for a vacation property.
Trump’s move against Cook is seen as the most significant challenge to the Fed’s independence since it was formed in 1913. Until now, no president has tried to remove a Fed official.
A decision from the Supreme Court is expected by the end of June.
“A Million Hard Questions”
Conservative Justice Samuel Alito expressed concern that the administration handled the case “in a very perfunctory manner.” Although the case involves Trump’s asserted cause for firing Cook, Alito said, “No court has ever explored these facts. Are the mortgage applications even on the record in this case?”
“There are a million difficult questions in this case,” Alito said.
When the Fed was created, Congress passed a law called the Federal Reserve Act, which included provisions intended to insulate the central bank from political interference, requiring governors to be removed by a president only “for cause,” although the law does not define the term or establish removal procedures.
Clement told the justices that Trump’s position would turn tenure protections for Fed governors into “at-will employment.”
“It doesn’t make sense,” Clement said. “There is no rational reason to go through all the trouble of creating this unique, quasi-private entity that is exempt from everything from the (congressional) appropriations process to civil service laws, just to give it a removal restriction that is as toothless as the president imagines.”
Roberts expressed doubts about Sauer’s arguments that the president’s affirmation of a case cannot be reviewed or that judges cannot reinstate a fired officer.
Conservative Justice Brett Kavanaugh expressed doubts about the real-world effects of the administration’s arguments.
“Your position,” Kavanaugh told Sauer, “that there is no judicial review, no due process, no available remedy, very low bar for a cause that the president alone determines — I mean, that would weaken, if not destroy, the independence of the Federal Reserve.”
Conservative Justice Amy Coney Barrett questioned why the Trump administration denied Cook a hearing to defend himself, saying it “wouldn’t have been that big of a deal” for Trump to sit down with Cook and present the alleged evidence against her.
Barrett also asked Sauer about the practical implications of allowing Trump to fire a Fed governor.
“We have amicus (friend of the court) briefs from economists telling us that if Gov. Cook is (fired), that would trigger a recession. How should we think about the public interest in a case like this?” Barrett asked, adding, “If there is a risk (at this preliminary stage of the case) doesn’t that counsel warn us?”
Sauer said Cook was notified in August of her termination, and that did not affect the markets. Sauer urged the justices to weigh doomsday forecasts of the US economy by economists in documents filed in the case arguing for “jaundice-eyed” Cook.
U.S. District Judge Jia Cobb ruled in September that Trump’s attempt to remove Cook without notice or a hearing likely violated her right to due process under the Fifth Amendment to the U.S. Constitution. Cobb also found that the mortgage fraud allegations likely weren’t legally sufficient cause to remove a Fed governor under the law, noting that the alleged conduct occurred before she served in the Fed job.
The U.S. Court of Appeals for the District of Columbia Circuit denied Trump’s request to stay Cobb’s order.
“You’re fired”
Conservative and liberal justices alike asked Sauer pointed questions about his contention that Cook was not entitled to formal notice and a hearing before the president fired him.
Conservative Justice Neil Gorsuch asked Sauer what such a hearing would look like and whether Cook would be entitled to legal counsel. Sauer responded that in the past the court has been very reluctant to “dictate the president’s procedures” and that it would be up to Trump to decide.
“I’m calling Ms. Cook into the (White House) Roosevelt Room, sitting across a conference table, listening for, I don’t know how long, how much evidence a lawyer needs and then making a decision? Could that be enough?” Gorsuch asked, adding, “Just a meeting at a conference table that ended with ‘You’re fired’?”
Conservative Justice Clarence Thomas asked Sauer on what basis the justices should conclude that the Fed is “an executive agency and therefore the president has removal authority.”
“There is an academic dispute as to whether or not the Federal Reserve’s open market operations constitute executive power or something else, essentially private conduct. However, over the years, Congress has pretty much stuffed traditional executive powers into the Federal Reserve,” Sauer replied.
As Fed governor, Cook helps set US monetary policy with the rest of the central bank’s seven-member board and the heads of the Fed’s 12 regional banks. Her term in office runs through 2038. Cook was appointed in 2022 by former Democratic President Joe Biden as the first black woman to hold the position.
Liberal Justice Ketanji Brown Jackson pressed Sauer to reconcile two seemingly conflicting positions: his assertion that the president has broad discretion to remove a Fed governor, and his acknowledgment that Congress included safeguards for Fed governors to protect the Fed’s independence from White House interference.
“How does this contribute to the goals of the statute?” Jackson asked.
Alito expressed skepticism about Clement’s argument that a Fed governor’s conduct before taking office cannot provide a basis for the president to remove him, asking Cook’s lawyer to address a series of increasingly egregious hypothetical scenarios.
“What if, after the person takes office, videos are revealed of the office holder expressing deep admiration for Hitler or the Klan?” Alito asked.
INDEPENDENCE OF AGENCY
In previous cases, the Supreme Court has reduced the independence of various federal agencies from presidential control and may soon overturn a key precedent that protected independent agency heads from impeachment since 1935.
But the court signaled last year that it might view the central bank as an exception, noting in a May ruling that allowed Trump to remove two Democratic members of federal labor boards that the Fed has a unique structure and historical tradition.
The Supreme Court has backed Trump in a series of emergency rulings since he returned to the presidency on immigration, mass federal layoffs, foreign aid cuts, dismantling the Department of Education and other issues.
The president tried to fire Cook on August 25, posting a termination letter on social media citing allegations of mortgage fraud uncovered by Federal Housing Finance Agency Director Bill Pulte, a Trump appointee.
The administration opened a criminal investigation into Powell this month over remarks he made to Congress last year about a Fed building project, a move it similarly called a pretext to gain influence over monetary policy.
(Reporting by Andrew Chung; Additional reporting by Jan Wolfe, John Kruzel and David Lawder in Washington and Ann Saphir in San Francisco; Editing by Will Dunham)