The ruling, which will almost certainly be appealed, is a blow to the Trump administration’s efforts to assert more control over the traditionally independent Fed, which sets short-term interest rates to achieve its congressionally mandated goals of stable prices and maximum employment. Congress has also sought to insulate the Fed from day-to-day politics.
Cook’s lawyers argued that firing her was unlawful because presidents can only fire Fed governors “for cause,” which has typically meant inefficiency, neglect of duty or malfeasance while in office. They also said she was entitled to a hearing and a chance to respond to the charges before being fired, but was not provided either. Her lawsuit denied the charges but did not provide more details.
Many economists worry that if the Fed falls under the control of the White House, it will keep its key interest rate lower than justified by economic fundamentals to satisfy Trump’s demands for cheaper borrowing. That could accelerate inflation and could also push up longer-term interest rates, such as those on mortgages and car loans. Investors may demand a higher yield to own bonds to offset greater inflation in the future, lifting borrowing costs for the U.S. government, and the entire economy.
No president has sought to fire a Fed governor before.
The Supreme Court has signaled that the president can’t fire Fed officials over policy differences, but can do so “for cause,” typically meaning misconduct or neglect of duty. Cook has not been charged with any crime.
