“As the Supreme Court wrestles with President Donald Trump’s efforts to expand traditional bounds of executive authority, the independence of the Federal Reserve is the next issue on the docket.” — Howard Schweitzer, CEO, Cozen O’Connor Public Strategies
The Cozen Lens
- The Fed’s credibility, and as a result, the efficacy of its monetary policy toolset, is at stake in this week’s Supreme Court case over President Trump’s attempt to fire Fed Governor Lisa Cook.
- In the absence of comprehensive federal rules on AI, a patchwork of state laws in red and blue states alike is developing.
- As with much of government, the Trump administration is also changing business as usual at the Pentagon.
What Makes the Fed Different?
A Unique Economic Tool. The Fed’s credibility has always been central to its ability to manage monetary policy, but the agency’s expanded influence and balance sheet post-2008 make it an increasingly appealing target for politicization by the White House.
- The Federal Reserve is both one of the most powerful governmental institutions in the US and also one of the few independent agencies that continues to be viewed favorably by a majority of the electorate. For the Fed, the faith that the public continues to place in it is paramount; one of the cornerstones of the central bank’s monetary policy toolset is its credibility. Because the public believes that the Fed will do what’s necessary to tame inflation, long-term inflation expectations often remain low even when inflation flares up, a dynamic best exemplified by the inflation bout of the last several years.
- Despite the centrality of the Fed’s credibility to its monetary policy toolset, the central bank’s expansion of its balance sheet over the last two decades, in the wake of the 2008 financial crisis and the pandemic, makes it an appealing target for any administration interested in adding to its own economic toolset.
- While not a perfect corollary to control of the Fed, President Trump’s recent move to purchase $200 billion of mortgage-backed securities through Fannie Mae and Freddie Mac demonstrates the power of unique economic policy tools like the Fed’s balance sheet on a smaller scale. Mortgage rates dropped to their lowest levels in years on the back of the announcement. A president with control of the Fed’s balance sheet could take even more dramatic steps to address issues like mortgage rates, making it an extremely appealing tool.
The Supreme Court as a Cautionary Tale. Politicization of the Federal Reserve risks undercutting the public’s faith in its independence, a dynamic best demonstrated by the electorate’s recent souring on the Supreme Court, albeit with worse economic ramifications.
- Faith in public institutions has been declining for decades, but only recently have some of the most powerful and important independent institutions, including the Supreme Court, succumbed to the dynamic. While politics has always played a role in the highly coveted life-time appointments to the high court, increasing partisanship within the electorate has permeated presidents’ judicial nominating decisions in recent years. At the same time, the salience of the Supreme Court’s opinions and each judge’s respective ideological leaning has risen. As a result, faith in the court’s decision making has fallen to historic lows, particularly among Democrats.
- Politicization of the Fed, and in particular the nomination process of Fed chairs and governors, risks sending it down the same path as the Supreme Court. For now, Pew Research polling suggests that the central bank’s favorability remains above water, but the same polling shows that Republicans have increasingly soured on the Fed, a dynamic that’s correlated with President Trump’s increasingly public criticism of the Fed. The appointment of ideologues atop the institution could risk similarly eroding Democrats’ high trust in the Fed, reducing its credibility and, as a result, its ability to fight inflation.
Why the Fed is Different. While the Supreme Court’s expected greenlighting of the White House’s firing of independent agency appointees has further weakened the independence of those institutions, the court has signaled that it may set a higher bar for presidential firings of Fed governors.
- In May, the Supreme Court stayed a lower court ruling that reinstated a member of the National Labor Relations Board who was fired without cause by President Trump , allowing those firings to move forward. The move signaled that the court believed the administration would win on the merits should the case reach the court, carving out a significant exception to the 1935 Humphrey’s Executor precedent in which it was determined that presidents can’t fire independent agency commissioners without cause.
- Despite the court’s expansion of the president’s ability to fire subordinates without case, the justices have vaguely indicated in footnotes to other decisions over the years that the Fed is a uniquely structured institution to which these rulings may not apply. It’s for that reason that the Trump administration is seeking to fire Fed Governor Lisa Cook for cause, an issue that the Supreme Court will hear oral arguments over on Wednesday. The case will determine whether the courts have judicial review authority over a president’s for-cause firings with potentially significant ramifications as to whether or not further firings of Fed officials proceed under this – and future – administrations.
States Battle Over How to Regulate AI
AI Regulation on the State Level. In the absence of congressional action on AI, states are taking the lead.
- While Democratic-controlled states have generally enacted tougher AI laws than Republican-controlled states, AI regulation is not a binary red vs. blue issue. Though President Trump has backed a light-touch approach, some Republicans on the state level are moving forward in developing new rules to govern AI.
- A growing patchwork of state AI laws raises the risk of compliance challenges for businesses that operate across state borders.
AI Regulation in Blue States. Democratic-controlled states have passed some of the farthest-reaching laws to govern AI.
- In 2024, Colorado became the first state in the country to pass a comprehensive law that regulated “high-risk” AI systems and banned algorithmic discrimination. Last year, lawmakers pushed back the implementation date from next month to June 30th, which gives the opportunity for revisions during this year’s legislative session. Trump’s executive order on federal preemption of states’ AI rules mentioned this law specifically.
- In California, Governor Gavin Newsom (D-CA) last year signed a first-in-the-nation AI safety bill into law. The measure requires large AI developers to share frontier model frameworks that touch on “national standards, international standards, and industry-consensus best practices” and disclose an assessment of catastrophic risks to the state. The law also includes a mechanism for reporting AI safety incidents and whistleblower protections.
AI Regulation in Red States. Blue states aren’t alone in enacting laws for this emerging technology.
- In Texas, Governor Greg Abbott (R-TX) last year signed into law a bill establishing guardrails on the use of AI, including disclosing when citizens interact with state agencies’ AI tools, prohibiting the collection of biometric data without consent, and banning AI systems that manipulate people, discriminate, or exploit children. The law also created a regulatory sandbox for companies to test AI systems, a business-friendly move.
- In Florida, Governor Ron DeSantis (R-FL) has made AI regulation a priority of his final year in office. Last month, he announced an AI Bill of Rights that would enact protections for name, image, and likeness (NIL) and user privacy; establish parental controls for AI tools; restrict AI use in insurance claims; and more. In his recent State of the State address, DeSantis argued that “we have a responsibility to ensure that new technologies develop in ways that are moral and ethical” and warned about AI’s impact on jobs and the costs of data center’s power demands. Florida’s legislative session began this month and is scheduled to run until mid-March but can be extended.
Disruption of the Military-Industrial Complex
Much More Than a Name Change. Disruption is a buzzword more commonly associated with Silicon Valley than the Pentagon but it’s also apt for the changes at the Department of Defense (DOD) under Secretary of Defense Pete Hegseth.
- Under Hegseth, the DOD is reorienting the military in line with the Trump administration’s National Security Strategy, which prioritizes homeland defense and the Western Hemisphere: US preeminence in the region, controlling migration flows, and fighting drug trafficking. President Trump’s strikes in Venezuela and threats against Greenland provide high-profile examples of the so-called “Donroe Doctrine,” a reassertion of the Monroe Doctrine under Trump. The Washington Post reported that the Pentagon has drafted a plan to reorganize the combatant commands in a way that would emphasize the Americas.
- On his “Arsenal of Freedom” tour, Hegseth emphasized the importance of building a strong defense industrial base. The Pentagon has turned to direct intervention to boost the defense sector. More than simply adding to the industry, this also ties into another goal of the administration: changing its structure. The CEO of a missile firm announced last week to be receiving a $1 billion investment from DOD remarked that “this could be the first step of deconsolidating the defense-industrial base.”
- In a speech given at SpaceX in Texas on the “Arsenal of Freedom” tour last week, Hegseth criticized the impact of the Clinton-era “Last Supper” that prompted post-Cold War consolidation of the sector. Trump has increased scrutiny of defense contractors by signing an executive order (EO) that threatens to target stock buybacks, dividends, and executive compensation of companies deemed poor performers. The EO does not directly prohibit stock buybacks and dividends but rather gives Hegseth a cudgel to pressure contractors to meet the Pentagon’s expectations regarding contract performance. Hegseth previously issued a major memo in November aiming to reshape the procurement process. While Trump’s move to target the corporate decisions of defense contractors goes against the grain of traditional free-market Republicans, his critique of the sector is not without support on Capitol Hill. Top defense hawks in Congress have echoed the Trump administration’s frustration with defense contractors.
Will Anything Stick? The military-industrial complex is much like the aircraft carriers it builds: so titanic its turns are glacial in pace.
- The administration wants to change the military procurement process but the process of doing so is not easy. Part of the inertia is left by legacy weapons systems and proven manufacturers; part is intentional decisions for equipment to be interoperable with what they already have, standardized, and open, modular interfaces. A government report finds that the average expected time for major defense acquisition programs from start to initial capability is almost 12 years. This White House has less than three years to make a big difference.
- While it’s undoubtedly Trump’s party, the funding still has to come from Congress, where even Republicans are occasionally dubious of his national security vision board. The president recently called for a $1.5 trillion defense budget in FY27 but the legislature continues to work on finishing up FY26 appropriations. The FY27 budget is technically due September 30th but is likely to be punted past the elections. The filibuster already practically requires Democrats to approve before passing defense funding; if they flip control of the House, it will then have to go through Democrats in the lower chamber too.
