The Trump administration has asked the Supreme Court to override lower-court decisions allowing Governor Lisa Cook to continue performing her Federal Reserve Board duties while the judicial system considers the substance of the issue — whether President Donald Trump has the power to remove her. A ruling on the procedural question could come any time in the next 2 weeks.

Lawyers for Federal Reserve Governor Lisa Cook urged the Supreme Court on 25th Sep to allow Cook to remain in office while her challenge to President Donald Trump’s attempt to fire her continues. In a 40-page filing, they told the justices that allowing Trump to remove Cook from office now would “dramatically alter the status quo, ignore centuries of history, and transform the Federal Reserve into a body subservient to the President’s will.”

In 2023, then-President Joe Biden nominated Cook to serve on the seven-member Board of Governors for the Federal Reserve. Unlike most federal agencies, the Federal Reserve is an independent government agency that is not funded by Congress through the normal appropriations process; instead, it operates primarily using interest earned on securities that it owns.

The composition of the board itself also reflects Congress’ effort to insulate the agency from outside political influences. Each member of the board is appointed by the president and confirmed by the Senate to serve staggered 14-year terms, a design intended to prevent any one president from “stacking the deck” with his own nominees. And under the Federal Reserve Act, the law creating the bank, the president can only remove members of the board “for cause.”

The court’s decision on this preliminary question could foreshadow how they’ll eventually decide the substance of the matter when that more fundamental question reaches them. Broadly, three outcomes on the procedural issue seem possible:

a. The justices could hand Trump a decisive victory by showing they’re inclined to overturn the 1935 precedent that allowed Congress to impose certain restrictions on a president’s power to fire certain executive branch employees. If they decide on above lines, they could allow Trump to proceed with removing Cook in the interim – creating a presumption that the removal will be permanent. The probability of this outcome to us is 60%.

b. Alternatively, they could grant Cook’s request to remain in office while the issue is decided on its merits. A decision along these lines would be more in line with their seeming leaning — in a separate ruling issued May 22 — to provide a specific carve-out for the Federal Reserve based on their description of it as “a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.” This to us looks like a 30% probability event.

c.    Or they could attempt to walk a middle path, reiterating their support for the Fed’s unique status while also declaring their reluctance to second-guess the president’s judgment on the issue of whether he’d met the legislative requirement of stating an adequate “cause” for firing Cook. This pathway would preserve the appearance of Fed independence – but in practice it would destroy it. Trump would be allowed to determine what constitutes “cause,” and would likely be empowered to reshape the board with his personal picks. Probability: 10%

Market Impact: The Supreme Court’s decision even on this procedural matter will have enormous ramifications for two main reasons.

1.    If Trump is allowed to proceed with removing Cook from the Fed board even in the interim while the issue is decided on its merits the president may feel empowered to move against other board members too. That could lead to policy chaos. If Cook is forced to step aside, Trump could see an opening to nominate a replacement. Whether the Senate would be willing to consider such a nomination is debatable.

2.    If the court rules in Trump’s favor, it could strengthen his hand ahead of a key deadline on March 1, 2026. By that date, the Board of Governors must vote whether to approve the reappointment of all 12 Federal Reserve Banks presidents. If Trump can assemble a willing coalition of four or more board members, he could gain enormous leverage over the decisions of the broader Federal Open Market Committee — the body that sets the interest rate the Fed controls.

We will then see US bond yields on short end falling due to rate cut expectations and rising on long end because of higher inflation expectations. 2-10 US SOFR can steepen to 50 levels from current 26 levels. DXY could swiftly breach 96.30 level support and move sub 95 levels. US small caps might rally more than Mag7 due to more rate cut expectations.