President Trump’s feud with the Federal Reserve is expected to take a major turn at the Supreme Court next week

As the Justice Department continues its investigation into the Federal Reserve, the next frontier in the central bank’s quest to maintain political independence will move to the Supreme Court.

On January 21, the high court will hear arguments related to President Donald Trump’s effort to remove Federal Reserve President Lisa Cook.

Administration officials last year accused Mr. Cook of committing mortgage fraud on properties purchased under the federal government’s subsidized housing program. Trump has tried to remove Cook from his post, but has so far been blocked by the courts. If the White House wins the case, it could set an important precedent for the president’s ongoing efforts to oust Fed Chairman Jerome Powell.

“If the court rules against Mr. Cook, it would significantly increase the likelihood that Mr. Powell will also be removed based on the Justice Department investigation,” Aditya Bhave, an economist at Bank of America, said in a note. “We have long argued that the Cook case is more important to the trajectory of policy than the identity of the next Fed chair, and we believe that is even more true now.”

The stakes for the Fed’s turmoil rose on Sunday when Chairman Jerome Powell announced that he had received a Justice Department subpoena regarding a controversial multimillion-dollar renovation project at the central bank’s headquarters in Washington, D.C. The investigation is reportedly focused on whether Powell lied about the project in Congressional testimony last year.

Trump has been a fierce critic of Powell and last year toyed with the idea of ​​firing him. Mr. Powell maintains that Mr. Trump cannot remove him from office, but that could change if the president can establish a cause.

On the surface, the effort to remove Powell appears academic, since his term as chairman expires in May and Trump is then free to submit a new candidate. But Mr. Powell’s term on the board ends in 2028, and as he said in a social media post on Tuesday, he could stay on and become a hindrance to Mr. Trump’s efforts to get the Fed to cut rates “meaningfully!!!”

But it could also provide further incentive for Mr. Powell to serve a term on the board as a bulwark against President Trump’s efforts to thwart the Fed’s independence from political manipulation.

Mr. Powell has largely resisted commenting on Mr. Trump’s criticisms, which have been deeply personal and sometimes harsh. Other presidents have tried to force the Fed to ease policy, but Mr. Trump stands out in terms of his willingness to do so publicly. Additionally, this is the first time the Justice Department has pursued a sitting Fed chair.

Several analysts have said that the combination of circumstances could lead to a long-term battle in which Powell decides to remain in the role.

Deutsche Bank has drawn similarities between Mr. Powell and former Federal Reserve Chairman Marriner Eccles, whose name still remains on the Fed building, who chose to remain in the role after President Harry Truman replaced him in 1948. Mr. Eccles remained president until 1951, and was a vocal supporter of central bank independence.

Moreover, a revolt within the Federal Open Market Committee, which determines the Fed’s interest rates, could even result in Powell remaining chairman, even though President Trump could appoint another chairman to run the central bank itself.

“While this is by no means the base case, and indeed the possibility seemed relatively remote, the events of this weekend are likely to increase the likelihood that Chairman Powell will choose to remain at the Fed,” Matthew Ruzzetti, chief U.S. economist at Deutsche Bank, said in a note to clients. “In fact, if the administration insists on pursuing Powell’s criminal prosecution and Senate Republicans remain adamant about not moving forward with Fed nominations, the FOMC is likely to choose to keep Powell in place.”

It goes back to the Cook hearings.

If Trump wins, he could use that to justify firing Powell. If Mr. Cook wins, it would begin a long battle of wills between the Fed and the White House that could have important policy implications.

Markets are looking for clues about the Fed’s moves, and traders are betting big on no action at its policy meeting later this month. The next rate cut isn’t expected until June, according to CME Group data.

Kevin Gordon, head of macro research and strategy at Charles Schwab, wrote that Cook’s decision “will have profound implications for the president’s ability to shape the structure of the Fed.” “But make no mistake: while the magnitude of the various market movements in response to the Powell news has been limited, the direction (lower dollar, lower stocks, lower bonds) is indicative of how these shocks will be digested if they persist over an extended period of time.”