Justices Give Fed A Shield Against Trump As Potential Rate Hikes Loom

New Federal Reserve Chair Kevin Warsh got a big boost for his job security from the Supreme Court at a crucial moment, with investors increasingly betting that he'll defy President Donald Trump and raise interest rates this year.

The high court on Monday upheld the constitutionality of the Fed's structure, including that its board members are shielded from removal by the president except for cause. The ruling protects the Fed’s independence across the institution, which is responsible for both monetary policy and bank regulation, despite the court’s simultaneous decision to reject such independence for other federal regulators.

Scott Alvarez, who served as the Fed's general counsel for more than a decade, highlighted the importance of that move, which he said would help prevent presidents from using the Fed’s regulatory powers as a backdoor to removing central bankers.

“The independence of the Fed, I don’t think that’s in doubt as a constitutional matter,” Alvarez said.

The ruling comes as inflation has surged back above 4 percent, leading multiple Fed officials to entertain the idea of raising rates this year to combat rising prices. Cost spikes could cool on their own — energy prices have been dropping on the news that oil is once again moving through the Strait of Hormuz — but consumer spending and growth have remained resilient enough to keep the possibility of higher borrowing costs on the table.

Warsh and his fellow Fed officials voted to hold rates steady at his first meeting as chair earlier this month, and Trump — who incessantly attacked former central bank chief Jerome Powell for keeping borrowing costs elevated — waved it off as “all right.” But any move to actively raise rates would likely anger the president, especially since he’s made clear that he expects his new Fed leader to bring rates down. The court’s ruling could bolster central bankers’ confidence that they could raise rates to combat inflation, if necessary, without worry of being abruptly fired by Trump.

Trump posted on social media after the ruling that he had lost on a “strictly procedural basis.”

“We will take appropriate action immediately to make sure that someone who has committed wrongdoing will not be making vital decisions concerning the Welfare of the United States of America!” he wrote.

For his part, Warsh has given no signals about where he thinks rates should go since taking over as head of the central bank, though he has pledged to restore price stability.

The Supreme Court ruling is a win for the central bank even as it leaves Fed board member Lisa Cook’s future in doubt. The majority of justices ruled that Cook had not received proper due process when the president tried to fire her last year. They said Trump must essentially start over if he wants to fire Cook and follow procedures that accord her clear notice of the allegations against her and an opportunity to respond.

Though the decision in Cook’s favor was made on a narrow 5-4 margin, Justice Clarence Thomas was the only one who explicitly made the case on constitutional grounds that the president should have wide latitude to dismiss Fed officials.

But the majority did not lay out a specific standard for what might qualify as a legal reason to remove her.

“The Supreme Court put its thumb on the scale for monetary policy, and it’s punted on regulation and supervision,” said Meg Tahyar, head of the financial institutions practice at the Davis Polk law firm. “In the meantime, over the next several years that it will take to fight this out, the Fed is protected.”

“The tsunami wave that hit all the other agencies missed the Fed today,” she added.