Cook Launches Legal Challenge Against Trump’s Firing. Here’s What Happens Next.

Lisa Cook, shown during a Senate hearing on her nomination to serve on the Federal Reserve Board of Governors in 2023. Photo: Drew Angerer/Getty Images

Federal Reserve governor Lisa Cook sued to block President Donald Trump’s recent move to dismiss her, setting up a potentially precedent-setting legal showdown between the White House and the central bank.

Cook’s lawsuit, filed Thursday in the U.S. District Court of Columbia, comes after Federal Housing Finance Agency Director Bill Pulte sent a criminal referral to Attorney General Pam Bondi, alleging the Fed official made false claims on mortgage agreements. Monday night, Trump cited that alleged mortgage fraud as cause for dismissal in a letter terminating Cook, the first Black woman to serve on the Fed’s board.

The lawsuit claims Trump’s actions violate governor Cook’s right to due process and her statutory right to notice and a hearing under the Federal Reserve Act. In addition to the lawsuit seeking redress, Cook is also seeking an emergency temporary restraining order to prevent the implementation of her termination.

A hearing has been scheduled for Friday morning to review Cook’s request for an emergency temporary restraining order.

“This case challenges President Trump’s unprecedented and illegal attempt to remove Governor Cook from her position which, if allowed to occur, would the first of its kind in the Board’s history,” according to the lawsuit. Further, the complaint says, if allowed to occur, Cook’s termination would subvert the Federal Reserve Act, which explicitly requires a showing of “cause” for a governor’s removal. The complaint notes that “an unsubstantiated allegation” about private mortgage applications does not rise to that level.

Along with Trump, Fed Chair Powell and the Board of Governors at the Fed are also named as defendants to the extent that they have “any ability to take any action to effectuate President Trump’s purported termination” of Cook.

“It is clear from the circumstances surrounding Governor Cook’s purported removal from the Federal Reserve Board that the mortgage allegations against her are pretextual, in order to effectuate her prompt removal and vacate a seat for President Trump to fill and forward his agenda to undermine the independence of the Federal Reserve,” the complaint says.

Trump posted a letter to Truth Social, terminating Cook and saying “the conduct at issue exhibits the sort of gross negligence in financial transactions that calls into question your competence and truthfulness as a financial regulator.”

A president can fire a Fed governor, but can only do so for cause. That typically involves issues such as malfeasance or gross misconduct.

Further, the lawsuit notes that Pulte’s criminal referral letter—the sole basis of the dismissal—says Cook “may have made false statements on one or more mortgage agreements” and such actions predate her Senate confirmation to her role at the Fed. The complaint argues that prior case law has established there must be a specific finding of “inefficiency, neglect of duty, or malfeasance” while in office to support a “for cause” dismissal.

Cook’s lawsuit claims that Trump did not send a copy of the termination letter before posting it to social media. “He provided no advance notice, nor any opportunity for Governor Cook to respond,” according to the complaint.

The Supreme Court recently ruled that Trump could fire the heads of independent agencies like the National Labor Relations Board, but took care to note that the Fed is a “uniquely structured, quasi-private entity.” A ruling on the Cook matter could clarify the extent of its independence.

“It is not obvious that he will be successful in removing Cook,” wrote Michael Feroli, chief economist at J.P. Morgan. The alleged mortgage fraud that Trump is using to support the “for cause”  firing occurred before Cook became governor. “For cause” protection is often believed to be limited to causes occurring during one’s tenure in office (though there is not a lot of precedent of for cause removals),” Feroli said.

As the case works its way through the legal process, the Fed will continue to carry out its duties as established by law, which include promoting maximum employment, stable prices, and a well-functioning financial system, a spokesperson said in a statement Tuesday. The central bank will abide by any court decision on the issue of Cook’s continued employment, the spokesperson said.

Trump made it clear on Tuesday that he is seeking to ensure that the majority of the governors serving at the Fed agree with his view that interest rates should be lower. While the president has pushed Fed policymakers to lower interest rates in the past, he had not previously explicitly discussed an effort to take control of the bank, which is supposed to be independent.

“We’ll have a majority very shortly,” Trump said during a televised Cabinet meeting. “So that’ll be great.”

It could be a long process. Trump, for instance, fired Federal Trade Commissioner Rebecca Kelly Slaughter in March, but she also challenged the termination. A federal judge ruled in her favor in July, restoring her to the position. But the administration has appealed the decision, and the case continues.

Write to Megan Leonhardt at megan.leonhardt@barrons.com and Nicole Goodkind at nicole.goodkind@barrons.com