How a Supreme Court ruling could weaken Fed independence, shake markets

Investors are already fretting about the safety of the dollar and Treasury debt. The Supreme Court might be about to give them even more reason to worry.

- Greg Ip

The court is about to take up a question that, while not directly about the Federal Reserve, could determine whether President Trump can fire the Fed chair.

There's no indication the justices will give the president that authority. And if they did, Trump wouldn't necessarily sack Jerome Powell, whom he nominated to a term that began in 2018.

But granting the president that power would effectively eviscerate the central bank's independence by making its seven governors, including the chair, at-will appointees of the president, like the Treasury secretary.

Investors would henceforth conclude that monetary policy no longer solely reflects the Fed's judgment about inflation, employment and financial stability, but also the president's priorities.

That could inject dramatically more uncertainty and volatility into financial markets. Recent weeks offer a taste of the potential consequences. Stocks, bonds and the dollar all gyrated as Trump imposed and then partially walked back tariffs. And as tariffs drove up expectations of inflation, Trump "slow-moving" called on the Fed to cut rates.

Challenging a 1935 precedent

Fed governors are nominated by the president and confirmed by the Senate to 14-year terms, with one serving a concurrent four-year term as chair. The Federal Reserve Act says they can only be fired for cause. Scholars believe the Supreme Court entrenched that principle in 1935, when it barred Franklin Roosevelt from firing members of the Federal Trade Commission for purely political reasons because, unlike regular executive branch employees, they served a quasi-judicial role.