House panel says it will examine allegations against Fed's Cook

The House Financial Services Committee said Tuesday it plans to look into the President Donald Trump’s allegations against Federal Reserve Governor Lisa Cook, weighing into the matter the day after Trump said he was removing her from her position at the central bank because of her statements on two mortgage applications.

“The independence of the Fed is a cornerstone of sound economic governance,” Dan Schneider, a spokesperson for Chairman French Hill, R-Ark., said in an emailed statement. “The allegations against Governor Cook are serious and the appearance of something unethical erodes trust in the Federal Reserve. Congress has a constitutional responsibility to provide oversight, and the Committee looks forward to examining these allegations.”

Cook said Tuesday she intends to file a lawsuit against Trump to halt his attempt at removing her from the Fed, setting the stage for a legal battle over what could be one of the most potent challenges to the Fed’s independence in its 111-year history.

The Fed itself also commented, saying Tuesday that it is standing by Cook.

“Lisa Cook has indicated through her personal attorney that she will promptly challenge this action in court and seek a judicial decision that would confirm her ability to continue to fulfill her responsibilities as a Senate-confirmed member of the Board of Governors of the Federal Reserve System,” a Fed spokesperson said in a statement. “As always, the Federal Reserve will abide by any court decision.”

“Congress, through the Federal Reserve Act, directs that governors serve in long, fixed terms and may be removed by the president only ‘for cause,'” the spokesperson added. “Long tenures and removal protections for governors serve as a vital safeguard, ensuring that monetary policy decisions are based on data, economic analysis, and the long-term interests of the American people.”

Cook’s lawyer, Abbe David Lowell, said Tuesday that Trump can’t fire Cook.

“President Trump has no authority to remove Federal Reserve Governor Lisa Cook,” Lowell, founder of the law firm Lowell and Associates, said in a statement. “His attempt to fire her, based solely on a referral letter, lacks any factual or legal basis. We will be filing a lawsuit challenging this illegal action.”

Trump on Monday night released a letter in which he said he was exercising his authority under Article II of the Constitution as well as the Federal Reserve Act of 1913 to remove Cook “for cause.” He justified his case by claiming that Cook had made misstatements on the two mortgage applications.

Trump’s threat to remove Cook comes amid his campaign to pressure Federal Reserve Chair Jerome Powell and his fellow Federal Open Market Committee members, including current members of the Fed board of governors, to lower interest rates. Cook, whose term isn’t scheduled to end until 2038, casts one of those votes on rate decisions.

The outcome of a court case could have far-reaching implications for the Fed, whose independence from political interference has become a bedrock of market trust.

The Supreme Court suggested in a ruling in another case this year there are limits on a president’s ability to fire a member of the Fed board.

The case centered on Trump’s dismissal of a member of the National Labor Relations Board, Gwynne Wilcox, and a member of the Merit Systems Protection Board, Cathy Harris.

The District Court for the District of Columbia had ordered that Wilcox and Harris be reinstated.

But the high court stayed that ruling, 6-3, allowing the two officials to be removed until courts decide whether the NLRB and MSPB are an exception to the rule that allows a president to dismiss without cause executive officers who act for the president.

Wilcox and Harris argued that they should receive the same “for cause” protections granted to members of the Fed and the FOMC.

“We disagree,” the Supreme Court majority wrote. “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.”

Cook’s case will likely be another test of the so-called Humphrey’s Executor Supreme Court decision that set a precedent for protecting the independence of some federal regulators and preventing their removal except for cause. It could set a precedent on what constitutes cause.

Democrats defend Cook

Democratic lawmakers were quick to defend Cook.

“This attempted firing shreds the independence of the Fed and puts every American’s savings and mortgage at risk,” Senate Minority Leader Charles E. Schumer, D-N.Y., said in a statement Monday.

“Donald Trump is playing a dangerous game of Jenga with a key pillar of our economy. This brazen power grab must be stopped by the courts before Trump does permanent damage to national, state, and local economies,” Schumer said.

House Financial Services ranking member Maxine Waters, D-Calif., said Trump is trying to take control of the Fed. The board consists of seven members. They join the president of the New York Federal Reserve Bank and four other regional bank presidents to form the FOMC, which sets benchmark interest rates.

“With one Fed Governor having recently stepped down, Trump’s vision is to replace Dr. Cook in order to secure a majority on the Board of Governors and more quickly gain full control over monetary policy,” Waters said in an emailed statement Monday. “A Trump-run Fed would be making monetary policy decisions for his personal and political gain instead of the public good — similar to what happens in authoritarian regimes like Russia and Venezuela.”

Waters was referring to the recent resignation of Fed Governor Adriana Kugler. Trump has said he will nominate Stephen Miran, the chairman of the Council of Economic Advisers, to replace her. With Fed independence now a hot topic, Miran’s confirmation hearing before the Senate Banking Committee could be contentious.

If Cook’s dismissal is upheld by the courts, it likely will usher in another tense confirmation hearing for Trump’s choice to replace her. A spokesperson for Senate Banking Chairman Tim Scott, R-S.C., didn’t respond to a request for comment.

The House Financial Services Committee doesn’t have a role in confirming Fed nominees, but the Republican majority in the current Congress has also joined the scrutiny of the central bank. The committee established a Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity. The panel reauthorized the task force in a July 22 resolution. The task force conducts hearings and investigations related to domestic monetary policy as well as the Federal Reserve Act and the Fed’s dual mandate to maintain stable prices and high employment.

A spokesperson for task force Chairman Frank D. Lucas, R-Okla., didn’t respond to a request for comment on Cook’s firing. House Financial Services Chairman French Hill, R-Ark., hasn’t commented on Cook’s situation.

Rate-setting disagreement

Fed decisions on whether to raise or lower interest rates are often unanimous, leaving unclear whether a change of one or two people on the FOMC would have an immediate effect on monetary policy. But two FOMC members — Fed governors Christopher Waller and Michelle Bowman — dissented from the July decision to hold rates steady.

Waller is a potential candidate to replace Powell as chair when Powell’s term in that role ends next May.

The FOMC next meets Sept. 16-17 to decide the fate of its benchmark interest rate. Powell hinted at a rate cut in his remarks on Aug. 22 at the Fed’s annual meeting in Jackson Hole, Wyo., with other global central bankers and economists, citing a weakening labor market despite continued inflation pressures.

There may be signs that the political pressure on the Fed is having a market impact. Michael Pedroni, a former Treasury Department and New York Fed official, said the spread between the yields on 30-year and 2-year Treasury bonds has risen to 1.23%, including a .05% increase since Monday.

“The widening has accelerated in the last couple days,” said Pedroni, CEO of Highland Global Advisors. “It’s pricing in some long-term risk associated with the Fed losing its independence to make monetary policy decisions on its own.”

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