Compared with Powell receiving subpoenas, next week’s court hearing is seen as far more consequential for the Federal Reserve’s independence

Although Federal Reserve Chair Jerome Powell ignited a political firestorm on Sunday by disclosing that he had received a Justice Department subpoena related to the renovation of the Fed’s headquarters, multiple Wall Street analysts argue that the real eye of the storm lies ahead: a US Supreme Court hearing scheduled for January 21.

On that day, the Court will hear arguments related to President Donald Trump’s attempt to remove Federal Reserve Governor Lisa Cook. The ruling could establish a critical legal precedent: whether the White House can invoke “for cause” provisions to bypass protections under the Federal Reserve Act and forcibly dismiss a sitting Fed official.

Bank of America economist Aditya Bhave was blunt in a recent note: “An adverse ruling for Cook would materially raise the probability that Powell could ultimately be removed as a result of the Justice Department investigation. We have long believed that the Cook case matters more for the policy outlook than the identity of the next Fed chair. We now believe that view is even more firmly supported.” He stressed that the case will serve as a litmus test for whether a president can reshape the Federal Reserve’s institutional structure.

Markets are watching closely. If the Fed’s independence were to be breached, the framework guiding monetary policy could shift from being evidence-based to politically driven—posing a fundamental threat to long-term capital costs and asset pricing.

The developments have already rippled through financial markets. According to CME Group data, traders have sharply increased bets that the Fed will take no action at its upcoming policy meeting, pushing expectations for the next rate cut out to June. Kevin Gordon, head of macro research and strategy at Charles Schwab, noted that while the immediate market reaction to Powell’s news was limited in magnitude, the direction was unambiguous: the dollar fell, equities fell, and bonds fell—offering a preview of how markets may price in this risk should the shock persist.

The Supreme Court’s “Decisive Battle”: The Chain Reaction from the Cook Case

For investors, Tuesday, January 21, is a date that deserves a circle on the calendar.

At the heart of the hearing is the Trump administration’s allegation that Lisa Cook misrepresented her primary residence on a mortgage application, constituting fraud. Although earlier efforts to remove her were blocked by the courts, a White House victory this time would clear the legal path for presidents to dismiss Fed officials “for cause.”

According to Axios, the Federal Reserve Act of 1913 allows presidents to remove board members only “for cause.” Jenny Breen, an associate professor of law at Syracuse University, noted that while the Supreme Court has previously granted presidents broader dismissal authority over officials at other agencies, it has historically sought to insulate the Federal Reserve as a “structurally unique, quasi-private entity.” A ruling in Trump’s favor, she warned, would mark a further erosion of constraints on executive power.

A Barron’s commentary cautioned that investors may be dangerously complacent. If the Court permits Cook’s dismissal, Trump would find it far easier to remove Powell on the basis of investigative findings. “If investors sense that Trump will gain broad authority to remove governors ‘for cause,’ this month could mark the beginning of the next bear market—or even a market crash,” the article warned.

Long-Term Structural Risks for Markets

The implications of this legal battle extend well beyond short-term volatility.

Barron’s argued that if Trump prevails and successfully “packs” the Fed, the worst-case scenario is not merely a dovish central bank tolerated during a benign phase of the cycle. The real danger emerges when the economic cycle demands rate hikes—and a politically loyal Fed refuses to act. At that point, markets would pay a far steeper structural price.

Charles Schwab’s Kevin Gordon emphasized that the Cook ruling “will carry enormous weight in defining the extent of any president’s ability to shape the structure of the Federal Reserve.”

Jenny Breen added that the investigation into Powell suggests a government increasingly unconstrained by democratic norms, making any judicial check particularly important. If the Court fails to clearly defend the Fed’s independence, the only remaining constraint may be the market itself—through a violent sell-off that halts further presidential interference with the central bank.

Powell’s Countermove: Staying On as Governor to Fight to the End

Ironically, the Trump administration’s aggressive tactics may prove counterproductive.

According to CNBC, the investigation into Powell—focused on whether he misled Congress about the renovation project—may instead harden his resolve to remain on the Federal Reserve Board after his term as chair expires in May.

While Powell’s chairmanship ends in May, his term as a Fed governor runs through 2028. That would allow him to remain on the Federal Open Market Committee (FOMC), serving as a continuing obstacle to Trump’s push for aggressive rate cuts.

Deutsche Bank’s chief US economist Matthew Luzzetti wrote to clients: “While this has never been our base case, the events of this weekend could raise the probability that Powell chooses to remain at the Fed. In fact, if the administration presses forward with criminal charges against Chair Powell and Senate Republicans refuse to advance nominations for new governors, the FOMC could plausibly select Powell to remain as chair.”

Data from Polymarket show that the probability of Powell staying on as a Fed governor after his chair term ends has risen above 55%. Since last week, the odds of his departure from the Board by year-end have fallen from 70% to below 60%.

Powell himself hinted at this possibility in a statement released on Sunday:
“I will continue to carry out the work the Senate confirmed me to do with integrity and a commitment to serving the American people.”