Fed for now avoids shock to independence after Cook ruling; Miran sworn in as governor

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By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The U.S. Federal Reserve began a two-day meeting on Tuesday with a new governor on leave from the Trump administration joining the deliberations and a second policymaker at the table still facing efforts by President Donald Trump to oust her.

The unusual circumstances, both historic in their own right, have changed what would have been a meeting focused on risks to the job market into a benchmark of Trump’s efforts to gain influence over monetary policy.

Trump said on Tuesday he had signed documents allowing Stephen Miran, who is on leave as head of the White House’s Council of Economic Advisers, to join the U.S. central bank’s Board of Governors. Miran was sworn into his Fed position later on Tuesday morning and the policy meeting began at 10:30 a.m. EDT (1430 GMT).

A White House spokesperson also said the administration would ask the U.S. Supreme Court to allow the president’s effort to fire Fed Governor Lisa Cook “for cause” to proceed.

A federal appeals court on Monday blocked Cook’s firing, paving the way for the Biden appointee to participate fully in the policy meeting this week. The Fed is widely expected to cut its benchmark overnight interest rate by a quarter of a percentage point to the 4.00%-4.25% range.

The timeline of any Supreme Court appeal and decision is unclear. The Fed will release a policy statement and updated quarterly economic projections at 2 p.m. EDT on Wednesday. Fed Chair Jerome Powell will hold a press conference half an hour later.

Markets have not reacted much so far to the Fed’s personnel drama, which despite the potential implications for central bank independence has yet to show Trump’s imprint on monetary policy, keep Cook from office, or force Powell out of his position.

New data released on Tuesday highlighted the policy dilemma the Fed is facing this week, with stronger-than-expected import prices, still-healthy consumer spending, and better-than-anticipated industrial output countering concerns among rate-cut advocates that the economy is at risk of a fast slowdown and rising unemployment.

Updated economic projections due to be issued after the end of the Fed’s policy meeting will show how its 19 policymakers evaluate inflation risks now that Trump’s final tariff schedule is largely known, how they anticipate unemployment to evolve in coming months, and how interest rates may need to adapt.

Investors currently expect three quarter-percentage-point rate cuts this year; Fed officials as of June anticipated two, but the evaluation of risks to the economy has been shifting.

“There are increasing divergent views on how much monetary policy should be eased over the coming months,” Kathy Bostjancic, chief economist at Nationwide, wrote in a note, with multiple dissents possible on a policy-setting committee that may be split over those who still feel rates should be held steady until inflation eases further towards the Fed’s 2% target, and those who feel faster cuts are appropriate.

Miran’s economic and rate projections in particular could show whether he backs the ultra-low interest rates and sunny economic outlook Trump has insisted on – with a forecast that lies outside that of his colleagues – or whether his views meld more indistinguishably with the others.

POLITICAL TURMOIL LIKELY TO CONTINUE FOR FED 

Trump on Tuesday said he agreed the Fed needs to be independent. Through much of this year he has berated Powell for not lowering the central bank’s policy rate, which he feels should be slashed to around 1% to make government borrowing cheaper and buoy the housing market, and pushed him to resign.

In a 2-1 ruling on Monday, a federal appeals court in Washington said Cook could remain in her job while litigation over Trump’s effort to fire her proceeds, a decision that absent a last-minute intervention by the Supreme Court means she will participate fully at the meeting this week.

White House spokesperson Kush Desai said the administration would appeal, but gave no other details.

“The President lawfully removed Lisa Cook for cause. The administration will appeal this decision and looks forward to ultimate victory on the issue,” he said.

The fact that courts have so far sided with Cook, avoiding the potentially disruptive ouster of an independent policymaker by a sitting president, has limited any market fallout from Trump’s unprecedented decision to say he had “cause” to fire Cook because of allegations she misrepresented information on a mortgage application.

Cook denies any wrongdoing and has not been charged with any offense. The Fed has said it would follow any court ruling on Cook’s status.

A divided three-judge appeals panel ruled that Cook is likely to succeed with her argument that she did not receive constitutionally required due process when Trump fired her in a social media post.

“Before this court, the government does not dispute that it provided Cook no meaningful notice or opportunity to respond to the allegations against her,” Judge Bradley Garcia wrote for the two-judge majority on the appeals court. He did not, however, address what constitutes “cause” for a presidential removal of a Fed governor, a central issue in the case.

With the substance of the Cook case pending and Trump considering replacements for Powell when his term atop the central bank expires in May, the political turmoil surrounding the usually staid and technocratic central bank will continue – keeping investors on edge.

Indeed, Miran’s approach to the job could offer a telling look at the Trump administration’s plans for the Fed. 

Absent a board majority to approve any sweeping changes, Miran, whose term in theory only runs until January 31, may have his largest impact through how often and how intently he speaks publicly about monetary policy, the Fed’s operations, the state of the economy, and things he thinks should change – even down to a Fed culture he has criticized sharply in past writings.

(Reporting by Howard Schneider; Editing by Dan Burns, Shri Navaratnam and Paul Simao)