President Trump’s power over the Federal Reserve will be front and center at the Supreme Court next week.

The justices on Wednesday will hear arguments on whether Trump can fire Fed Governor Lisa Cook over accusations of mortgage fraud. 

Looming over it all is the Justice Department’s criminal investigation into Jerome Powell, the Fed’s chair, which came into public view last weekend.

Testing the bounds of Trump’s power

In his second term, Trump has looked to reshape independent agencies that have long enjoyed protections that prevent the president from firing those who lead them on a whim.

Trump argues it infringes on his constitutional authority to oversee the executive branch, part of an expansive view of presidential power known as the unitary executive theory.

“Once Trump controls a majority of the Fed, he can use the Fed’s vast powers to enrich himself personally – to reward his billionaire friends and to punish his enemies,” Sen. Elizabeth Warren (D-Mass.), a critic of Powell’s who has defended him against Trump’s firing threats, told reporters. “That has been his strategy across the government.”

The Supreme Court’s conservative majority has appeared sympathetic to Trump’s efforts to eviscerate firing protections at other independent agencies, like the Federal Trade Commission and National Labor Relations Board. 

But  the justices have suggested they view the Fed as possessing special status that could justify the protections.

“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.

Trump has appeared to take note of the signals.

Powell remains in his job despite Trump’s monthslong public musings that he may fire the central bank chief and repeated condemnations for not lowering interest rates faster. And in terminating Cook, rather than arguing her firing restriction is unconstitutional, the president purports to have valid cause — mortgage fraud — that follows the statute.

‘For cause’

The Federal Reserve Act of 1913 prevents the president from firing the central bank’s governors except “for cause.”

The law does not, however, explicitly define what “cause” means.

Trump is the first president to fire a sitting Fed governor, making it an unanswered question the Supreme Court is now poised to review.

“The language ‘for cause’ is a legal term of art – it has to be cashed out,” Lev Menand, a Columbia Law School professor who previously worked at the Federal Reserve Bank of New York, said on a press briefing.

All sides agree Trump can’t terminate Cook merely over her vote on interest rates.

Trump fired Cook over accusations of mortgage fraud, saying she falsely listed an Atlanta property as her primary residence to gain favorable mortgage terms. Cook’s lawyers have described it as an “inadvertent notation” and deny she had any intent to defraud.

The Justice Department will argue Wednesday that Trump has discretion to remove Fed governors for reasons related to their conduct, ability, fitness or competence.

“The President’s removal of Cook for her material misrepresentation (and, at minimum, gross negligence) in financial transactions easily qualifies,” Solicitor General D. John Sauer wrote in court filings.

Sauer on Wednesday will argue the case for the government. Cook will be represented by Paul Clement, one of Sauer’s predecessors who served under former President George W. Bush.

The conservative lawyer has represented several other clients opposing Trump administration efforts. Clement represents WilmerHale in its fight against Trump’s executive order targeting the law firm and education groups in their fights against federal research grant cuts.

Cook’s team has argued that the mortgage fraud accusations are “untested” and involve conduct before she was appointed to the Fed. They also contend she was entitled to a hearing under due process protections in the Constitution and federal law.

Trump’s “boundless interpretation of ‘for cause’ would destroy the Federal Reserve’s historic independence,” Cook’s team wrote in court filings.

Cook’s position is supported by former Fed Chairs Ben Bernanke, Alan Greenspan and Janet Yellen. They submitted a joint, written brief that also included former Treasury secretaries Tim Geithner, Jack Lew, Hank Paulson, Robert Rubin and Larry Summers.

“Allowing the government to remove a member of the Board of Governors for the first time in the Nation’s history, while under the cloud of legal challenge, will erode public confidence in the Fed’s independence and threaten the long-term stability of our economy,” their filing reads.

Trump’s appeal garnered support from the America First Legal Foundation and the libertarian New Civil Liberties Alliance. Twenty-two Republican state attorneys general are backing the administration, while 23 Democratic state attorneys general are backing Cook.

Powell investigation intensifies

Trump’s quest to exert greater control over the Fed has taken another twist in the days leading up to Wednesday’s argument.

Last week, Powell announced that the Justice Department had issued a subpoena as part of a criminal investigation.

The probe stems from Powell’s Senate Banking Committee testimony last June over renovations to the Fed’s headquarters.

The project, initially estimated to cost $1.9 billion, has risen to $2.5 billion. The central bank has cited higher costs for materials, equipment and labor, design changes and “unforeseen conditions.”

“Those are pretexts,” Powell said of the investigation in a video statement. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.”

The investigation came to light after written briefing concluded in Cook’s Supreme Court case, but the issue could now come up at Wednesday’s oral arguments.

Powell’s term as Fed chair ends May 15. It may come before a decision in Cook’s case, which is expected by the end of June.

Though he could step down entirely, his seat on the Fed’s governing board extends through January 2028.

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