Cook refuses to resign and vows to sue, claiming Trump lacks the legal authority to fire her.

Written by: Bao Yilong, Wall Street Insights

U.S. President Trump’s attempt to fire Federal Reserve Board member Lisa Cook is sparking a significant legal controversy regarding the White House's control over the Federal Reserve.

On August 26, Wall Street Insights reported that Trump announced on social media that he was terminating Cook's position as a Federal Reserve Board member "immediately," accusing her of fraudulent behavior in mortgage applications. Cook's defense attorney, Abbe Lowell, has pledged to file a lawsuit in response. Cook stated in her announcement:

President Trump claims to have "reason" to fire me, but there is no legal basis for this, nor does he have the power to do so. I will not resign. I will continue to fulfill my duties to help the U.S. economy, just as I have been doing since 2022.

Cook was appointed by President Biden in 2022, with a term set to last until 2038. Bill Pulte, Director of the Federal Housing Finance Agency, accused Cook of misconduct during the application process for two housing mortgages in 2021, which could constitute mortgage fraud.

However, these accusations are still just that—accusations. Cook has not faced a formal investigation or criminal charges, nor has she been convicted. The alleged misconduct occurred a year before Cook's appointment as a board member and is unrelated to her duties as a Federal Reserve Board member. Legal experts believe that unproven allegations are unlikely to meet the standard for "removal for cause."

According to Section 10 of the Federal Reserve Act of 1913, members of the Federal Reserve Board can only be removed "for cause," but the law does not explicitly define what constitutes "cause." Generally, "cause" typically includes three scenarios: inefficiency, neglect of duty, and misconduct during the term of office.

The outcome of the dispute between Trump and Cook will largely depend on the court's interpretation of the legal standard of "for cause."

Legal Proceedings: Preliminary Injunction Becomes Key

If Cook files a lawsuit, she can immediately seek a preliminary injunction to prevent her dismissal while the lawsuit is ongoing.

Both parties will submit briefs outlining their respective arguments, and the Trump administration will have the opportunity to provide more details regarding the allegations against Cook.

The outcome of the injunction ruling may depend on Cook's ability to persuade the judge that if the status quo is not maintained, she and the Federal Reserve will suffer "irreparable harm."

A decision on the preliminary injunction could come quickly, which is crucial, as the judge's ruling on whether the case actually constitutes "for cause" dismissal may take months or longer.

The case may not be delayed for too long. Both parties can appeal the injunction ruling to the federal appeals court. If Cook's injunction request is denied and the appeal upholds the ruling, her dismissal will remain in effect. If the injunction is granted and supported by the appeals court, Cook can continue to serve during the progression of the case.

The Supreme Court May Be the Final Arbiter

This dispute may ultimately be decided by the U.S. Supreme Court.

Any ruling regarding the preliminary injunction can be appealed to the federal appeals court and eventually reach the Supreme Court.

Given that Trump holds a 6-3 conservative majority in that court and that the court has repeatedly allowed his legally challenged policies to take effect this year, this may put him in a favorable position in the litigation.

However, the Supreme Court provided an important hint in a ruling earlier this May. At that time, the court allowed Trump to dismiss officials from two other government agencies without providing a reason but specifically noted that this decision did not imply that the president has similar powers over the Federal Reserve, stating that the Federal Reserve is "a uniquely structured private entity."

This statement has been interpreted to mean that Trump cannot dismiss Federal Reserve officials without cause, but it leaves open the possibility of dismissing Cook for "cause." Reportedly, in U.S. legal practice, "for cause" is typically interpreted to encompass three scenarios: inefficiency, neglect of duty, and misconduct during the term of office.

However, there has yet to be a unified consensus on these terms, which gained prominence in Congress over a century ago. The judge will have to determine whether the allegations of mortgage fraud against Cook constitute any of these.

If the case ultimately reaches the Supreme Court, it will be a direct test of this gray area.

The Background of the "Mortgage Fraud" Allegations

Bill Pulte, Director of the Federal Housing Finance Agency, is a staunch ally of Trump, and he accused Cook on social media of lying in loan applications for two properties.

Previously, Wall Street Insights mentioned that Cook listed properties in Michigan and Georgia as her primary residences to obtain more favorable loan terms. He stated that the applications for the two properties were submitted two weeks apart.

Trump stated in a letter that it is "incredible" that Cook was unaware that the two separate mortgage applications submitted in the same year required her to list each property as her primary residence. Trump wrote:

At the very least, the actions involved demonstrate serious negligence in financial transactions, raising doubts about your experience and credibility as a financial regulator.

According to media reports, the Trump administration has also made similar accusations against other critics, such as California Senator Adam Schiff and New York Attorney General Letitia James, both of whom have denied the allegations.

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