SCOTUS hears lawsuit over firing of Federal Reserve Governor Lisa Cook
The Supreme Court heard arguments regarding President Donald Trump’s attempt to fire Federal Reserve Board President Lisa Cook.
The Fed is expected to keep interest rates on hold at the end of its two-day meeting on January 28, but political and legal uncertainty hangs over the central bank.
The Federal Reserve has cut interest rates in its last three meetings, with the federal funds rate ranging from 3.5% to 3.75%. Economists see little hope of further rate cuts this month as inflation and the labor market have changed little since policy makers last met in December, with some members suggesting policy is close to neutral.
“Annotations will be a focus,” said Liz Thomas, head of investment strategy at SoFi. Thomas said he will listen to whether Chairman Jerome Powell signals that the Fed is as concerned about the labor market as it was last year, how the agency assesses inflation risks as the legal battle over tariffs continues, and whether Powell mentions recent geopolitical developments over Venezuela and Greenland.
The meeting will also be the first since the Supreme Court heard oral arguments in a case involving Federal Reserve President Lisa Cook and since Mr. Powell acknowledged he was under investigation by the Justice Department. Both developments raise concerns about the central bank’s independence from politics.
With Chairman Jerome Powell’s term set to end in May, Treasury Secretary Scott Bessent said President Donald Trump’s nomination for the next chairman will be made soon, raising questions about the Fed’s future leadership.
Will the Fed cut interest rates?
After its December meeting, the Fed’s dotplot (a graph that shows policymakers’ expectations for future interest rates) suggested that the bar for further rate cuts could get even higher.
The Fed has a dual mandate to keep unemployment low and prices stable, but last year’s federal government shutdown interrupted the release of major reports, so last time officials were working from limited recent government data on the job market and inflation. At the time, unemployment was rising and annual inflation was 3% in September, according to the latest government data available.
Now, policymakers have data for November and December. The consumer price index showed annual inflation at 2.7% in both months, and the December jobs report showed the unemployment rate had fallen slightly after hitting a four-year high in November.
“Right now we are pretty close to neutrality,” said Van Hesser, chief strategist at KBRA, adding that he did not expect a rate cut at the January meeting. “But we would like to see some language that suggests a better balance in the economy.”
If not now, then when?
Hesser said economists continue to closely track inflation above the Fed’s 2% target, especially since the U.S. economy is set to receive a boost in the first quarter of 2026. Those include tax refunds from recent legislation, infrastructure spending and the overall economy-wide impact of the Federal Reserve’s delay in cutting rates the past three times, he said.
A Bank of America Global Research report released on Jan. 23 said there is “no need to rush to act” between the expected stimulus and the Fed’s assessment that policy is largely neutral.
Economists at Oxford Economics and Wells Fargo seem to agree. Michael Pearce, chief U.S. economist at Oxford Economics, said the baseline is for the Fed to cut interest rates in June and September.
“For the Fed to cut rates sooner and more aggressively, labor market conditions would have to deteriorate significantly, which we believe is unlikely,” Pierce said in a Jan. 22 report.
Economists at Wells Fargo said in a Jan. 23 note that they expect rate cuts of two quarter points in March and June, but “risks to our forecast appear increasingly tilted toward a potential tapering or delay in easing this year.”
Evolving Federal Reserve System
Policy is expected to remain steady in the short term, but concerns about the future direction of the central bank are growing due to President Trump’s push to cut interest rates, the Cook scandal, the Powell investigation, and the appointment of the next Fed chairman.
Pearce said that while the risk is “small,” if the Trump administration succeeds in removing Cook, it “could pave the way for a significantly more dovish transformation of the committee over time,” meaning the committee could be more inclined to cut rates.
Thomas said the Supreme Court justices appear to be skeptical of the Trump administration’s arguments in the Cook case, and since the president is likely to announce his nomination for Fed chairman in the coming weeks, “we may be able to remove two out of three question marks” soon.
“They have the potential to threaten the Fed’s independence…but none of that has actually happened yet, and nothing has actually changed yet,” Thomas said. “I think the Justice Department investigation is a distraction. It’s impossible to know what effect it will have on anything, so it’s unfortunate that we as investors have to try to figure it out.”
Chairman Powell’s term is scheduled to end in May, but the board’s term remains until 2028. He has not announced whether he intends to remain in office.
Trump and Bessent’s comments suggest that front-runners to become the next chairman could include National Economic Council Director Kevin Hassett, former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, and BlackRock executive Rick Rieder.
If Trump chooses a chairperson who is not currently a member of the board, he would have to create a vacancy and confirm with the board.
Contact Rachel Barber at rbarber@usatoday.com and follow her at X @rachelbarber_
