Economic Luminaries Enter Legal Battle Over Fed Independence (1)

A bipartisan group of former Treasury secretaries, Federal Reserve chairs and other experts urged the US Supreme Court not to let President Donald Trump fire Fed Governor Lisa Cook, arguing that the health of the economy is at stake.

Allowing Trump to oust Cook while she challenges her removal would erode the public’s trust in the Fed and undermine efforts to stabilize prices, increase employment and moderate long-term interest rates, the group said in a friend-of-the-court brief filed with the justices on Thursday.

“Doing so would expose the Federal Reserve to political influences, thereby eroding public confidence in the Fed’s independence and jeopardizing the credibility and efficacy of US monetary policy,” the group, which includes former Fed chairs Ben Bernanke, Alan Greenspanand Janet Yellen, said in the filing.

Former Federal Reserve Chairs Janet Yellen and Ben S. Bernanke

Photographer: Andrew Harrer/Bloomberg

The Justice Department has asked the Supreme Court to let Trump remove Cook while the administration fights a lower court ruling that declared the economist likely to succeed in her lawsuit and barred the Fed from carrying it out. Cook has continued serving in her post since late August, when Trump announced he would remove her due to mortgage fraud allegations that she’s denied.

Cook’s lawyers are due to respond to the government’s request to the high court later on Thursday. The court set a fast schedule for written briefs but hasn’t said exactly when it intends to issue an order.

The Supreme Court this year has largely sided with Trump in other fights over his firing decisions, but the justices previously made a point of distinguishing the Fed as a “uniquely structured, quasi-private entity.” A key question with Cook is whether the court will apply that distinction in a case involving alleged wrongdoing by a Fed official.

The former officials who weighed in to support Cook is a Who’s Who of policymakers who have steered the world’s biggest economy over the past several decades, including those on both sides of the political party divide and those who advised both Republican and Democratic presidents.

The group warned that any erosion of Fed independence could lead to higher inflation.

Treasury Secretaries

“There is broad consensus among economists, based on decades of macroeconomic research, that a more independent central bank will lead to lower and more stable inflation without creating higher unemployment — thus helping to achieve the Federal Reserve’s statutory objective of price stability and maximum employment,” the group wrote.

In addition, the brief was joined by former Treasury Secretaries Timothy Geithner, Jacob Lew, Henry Paulson, Robert Rubin, Lawrence Summers and Yellen. Paulson served under the former Republican President George W. Bush; the other ex-secretaries were appointed by Democrats.

Trump’s first Treasury chief, Steven Mnuchin, was not listed on the brief.

The intervention also lays bare the level of concern there now is on the political threat to the Fed’s independence. In their argument, the former officials warned of the example of central bank’s that are not independent of government that prioritize short term gains that results in longer term harm. Critically, the former officials argue that removing Cook would erode both public confidence in the Fed’s independence and threaten the economy’s long term stability.

The former officials, who aren’t involved in the litigation, said that Trump’s attempt to dismiss Cook amid his calls for lower interest rates would undermine the Fed’s mission.

Fight Inflation

“The Fed’s ability to fight inflation is directly related not only to its actual insulation from short-term political pressures but also to the public’s perception of its independence,” they argued. “Because if the public and financial markets believe that the Federal Reserve is sufficiently insulated, they will act in accordance with that expectation, resulting in lower and more stable inflation, which is consistent with lower long-term interest rates.”

The group urged the justices to consider their expertise on the subject, which “convinces them that reducing independence can result in higher inflation and higher borrowing costs.”

Former Fed vice chair Alan Blinder, who was not one of the people named in the filing, said it demonstrates “that there is gigantic bipartisan support from academics, former office holders and the business community that annihilating the Federal Reserve’s independence, which removing Lisa Cook in this way and with this timing would amount to, is a terrible idea.”

“If President Trump is allowed to do this to Lisa Cook, he can do this to anybody and the independence of the Fed is history,” Blinder added.

Claudia Sahm, chief economist at New Century Advisors and a former Federal Reserve economist, said it was important the brief emphasized that economies tend to suffer in nations where central banks become politicized. “It very much underscores that the Federal Reserve, as an institution, is designed to be and should be nonpartisan,” she said.

The filing pointed to the example of former Fed chair Arthur Burns, who in the early 1970s was pressured by then-President Richard Nixon to reduce unemployment by lowering interest rates. Under Burns, the Fed made only “limited efforts” to maintain independence and ultimately enabled volatile inflation for “political reasons,” according to the brief.

“This contributed to an ‘inflationary boom’ and deep recession that took years to bring back under control,” the group said in their brief.

‘Primary Residence’

Trump said last month he was firing Cook after Federal Housing Finance Agency Director Bill Pulte accused her of fraudulently listing homes in Michigan and Georgia as a “primary residence” when she obtained mortgages in 2021 to secure more favorable terms on loans. Cook has denied committing mortgage fraud and has remained on the job.

The former officials said sectors that “pay close attention” to the Fed are watching the dispute closely “to judge how credible the Fed will be going forward.”

“Those audiences will be more skeptical of the Fed’s independence and commitment to long-term low-inflation policies if it appears that a member of the Board of Governors is being removed based on allegations that are actively under challenge in litigation,” they said in the brief.

The filing from the former economics officials was prepared by lawyers at Covington & Burling, one of the law firms that Trump has taken action against. The White House issued a memorandum earlier this year targeting the firm.

(Updates with outside comments. An earlier version corrected the presidential action against Covington in final paragraph.)

--With assistance from Greg Stohr, Michael McKee, Amara Omeokwe and Jonnelle Marte.

To contact the reporters on this story:
Erik Larson in New York at elarson4@bloomberg.net;
Zoe Tillman in Washington at ztillman2@bloomberg.net;
Enda Curran in Washington at ecurran8@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Wasserman at ewasserman2@bloomberg.net

Sara Forden

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