Cook Case Tests The Limits Of Fed Independence

Authored by Alexander W. Salter via The Daily Economy,

President Trump has renewed his effort to remove Lisa Cook from the Federal Reserve Board.

Whether he has a legitimate reason to fire her is another matter. The White House announced a three-person “committee of inquiry” to investigate whether Cook made false statements on mortgage applications, and whether that is sufficient cause to remove her from her post. Next month, the committee will question her at a White House hearing.

This is Trump’s second attempt. In June, the Supreme Court blocked the first one. As I wrote at the time, the ruling carved out a special exemption for the Fed. That same morning, the justices ruled in Trump v. Slaughter that agency heads who wield executive power answer to the president. Then immediately, they shielded the most powerful agency of all from the impact of that ruling.

But the June decision was narrow: Cook was entitled to notice and an opportunity to respond before removal for cause. The White House is now complying with both requirements. Cook’s lawyers maintain that the alleged infraction – designating two properties as her “primary residence” – was just an “inadvertent error,” pointing out that the president’s and Treasury Secretary Bessent’s own property filings contain the same discrepancy.

Whether the allegations around mortgage documents are proven or not, the real stakes are much bigger. President Trump’s attempt to unseat Cook ultimately tests central bank independence. The conventional defense of central bank independence, reinforced by the high court’s treatment established in Slaughter, holds that the Fed should be insulated from political accountability to do its job well. That doctrine deserves far more scrutiny than it usually gets.

Central bank independence rests on two claims.

The first is empirical: independent central banks supposedly deliver lower inflation. But the evidence for that is decidedly mixed, and varies with the sample and the estimation method. There’s a simpler explanation that also fits the data: countries that respect the rule of law also tend to keep prices stable. Sound money comes from sound institutions, not from insulated technocrats.

The second claim is constitutional: the Fed’s insulation supposedly fits within our system of separated powers. But it does not. Congress holds the power to coin money and regulate its value, and has delegated substantial power to the Fed. Many of the Fed’s activities, particularly bank supervision and enforcement actions, involve the exercise of executive power. The Constitution vests the executive power in a president, who answers to voters. If central bankers who exercise that power are shielded from discipline and removal, then they answer to no one.

Milton Friedman made the fundamental argument more than 60 years ago in Capitalism and Freedom:

Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an ‘independent’ central bank.

An independent central bank concentrates power while diffusing responsibility. When policy fails, no one is answerable for the failure.

The Fed’s recent record bears Friedman out. Following COVID-19, the central bank delivered the worst inflation in four decades. Five years later, inflation still runs above target. No one was fired, demoted, or made to face any meaningful consequence. While failing at its price stability mandate, the Fed took up projects Congress never authorized, issuing climate-risk guidance for large banks and building out DEI programming. This is what bureaucracies do when nobody can discipline them.

Cook is not a bystander here. She has served on the Board since May 2022, with inflation at 40-year highs. She attributed the Fed’s inflation failures to supply constraints rather than monetary policy. And when the Board rescinded its climate guidance last fall, she formally objected. None of this constitutes “cause” in the White House’s sense, and Trump’s motives are doubtless partisan. But it does illustrate the deeper problem: Fed officials operate in a system where poor performance carries no penalty.

The president’s committee will likely recommend firing Cook. If the president follows through, another round of litigation is likely. Remember, the problem is not a specific monetary policymaker’s alleged wrongdoing. It’s central bank independence itself. The solution is accountability of the ordinary kind: a limited mandate simple enough for citizens to evaluate, with meaningful consequences for poor performance. Eventually, a monetary rule could further limit officials’ discretion. As Friedman put it:

The only way that has yet been suggested that offers promise is to try to achieve government of law instead of men by legislating rules for the conduct of monetary policy that will have the effect of enabling the public to exercise control over monetary policy through its political authorities, while at the same time…[preventing] monetary policy from being subject to the day-to-day whim of political authorities.

The case for central bank independence rests on a straw man. Neither Congress nor the President will set interest rates. What matters is who’s ultimately in charge, especially with inflation above the Fed’s target for more than five years. The American public can’t afford the Fed’s simultaneous concentration of power and exemption from accountability.