President Donald Trump said he will fire Governor Lisa Cook at an unprecedented stage, an unprecedented step that will allow him to test the presidential boundaries to central bank independence.
In a letter posted on social media on Monday, Trump told Cook that “there is good enough reason to remove you from your position.” Trump claims he misleading that Cook intends to live in two homes as her main residence in 2021.
Cook, who was appointed to the Federal Reserve (or Fed) committee in 2022 by former President Joe Biden, has yet to provide a detailed explanation of the transaction since the issue was raised by the federal housing finance agency last week.
Trump’s letter escalated his fight to control the Fed’s shocked financial markets. Both the US dollar and the long-term Treasury department fell on Tuesday. The President keeps little secret behind his desire for the US Central Bank to promote growth by lowering interest rates.
So why is Trump stepping up his attack on the Fed and how does it affect central bank independence?
What did Trump say to the Fed governor?
In the letter, Trump said he falsified the bank’s records to obtain favorable mortgage terms before Cook joined the Fed. He accused her of being “a deceitful and criminal act in financial matters,” and he said he was not confident in her “integrity.”
“At the very least, the act in question shows a kind of negligence in financial transactions that challenge your ability and reliability as a financial regulator,” he adds, claiming his power to dismiss Cook under Article 2 of the US Constitution.
Last Friday, Trump threatened to fire Cook, a former economics professor at Michigan State University and the first African-American woman to serve on the Federal Reserve Committee.
However, Cook said in an August 20 statement, “I am not going to be bullied to step down from my position due to some of the questions raised in the tweet.”
“As a member of the Federal Reserve, I take my financial history seriously, so I gather accurate information, answer accurate questions and provide facts,” she said.
Trump’s latest salvo comes amid repeated attacks on Federal Reserve Chairman Jerome Powell, because it doesn’t cut interest rates quickly enough. Trump threatened to fire Powell, who had previously warned that the president’s trade tariffs would push prices for US consumers.
Does Trump’s latest move constitute an attack on the Fed’s integrity?
Although the Federal Reserve Governors’ employment terms are designed to exceed certain presidential tenure, the Federal Reserve Act allows the removal of incumbent governors “for a cause.” Cook’s terminology is currently set to last until 2038.
The governor’s strong removal has never been tested, especially since the 1970s, by a US president who took a “handoff” approach to the Fed’s issues as a way to ensure confidence in US monetary policy.
The Federal Reserve’s ability to set interest rates that affect borrowing costs for consumers and businesses without interference from Washington is widely considered an important belief in trust in the US economy.
Before making decisions about Cook’s future, financial market participants say Trump’s attacks raise questions about the Fed’s future.
For Karsten Junius, chief economist at Bank J Safra Sarasin, “political interference makes monetary policy decisions efficient and reliable,” he told Al Jazeera, “it makes fighting inflation even more difficult.”
Junius also said Washington’s efforts to influence monetary policy “will have a negative impact on the bond market… which will create greater uncertainty and lead to higher long-term borrowing costs (of the US government).
Bonds are essentially loans made by investors to the US government, and are repaying interest over time. They have long been considered one of the safest assets in the world, as Washington has a very low risk of failing to pay off investors.
How is the Fed organized?
The US monetary policy decision is made by the Federal Open Market Committee (FOMC), which consists of seven members of the board appointed by the president, and is further comprised of a rotating group of five presidents from 12 regional banks.
The New York federal government president has a permanent voting spot, reflecting the city’s financial influence. The other four votes revolve among the remaining 11 regional bank presidents annually, ensuring that different parts of the country are speaking up to policy debate.
This structure balances national surveillance from Washington with regional opinions from all over the United States, aiming to create monetary policies that reflect both national and regional economic realities and interests.
If Trump succeeds in removing the cook, it will give him the opportunity to secure a four-person majority on the Fed’s governor’s committee, which will help him gain more control over monetary policy, namely, by lowering monetary policy, or interest rates.
What happens next?
In a hot speech at the Fed’s annual economic summit last Friday in Jackson Hole, Wyoming, Powell sent the strongest signal, but said the Fed would soon begin to lower interest rates, saying, “The balance of risks needs to adjust our policy stance.”
So far, the Fed has stabilized interest rates in the 4.25-4.5% range, following a 1-point percentage cut in 2024.
Monthly employment growth slowed this summer, with the world’s largest economy adding just 73,000 jobs in July. From May to July, there were 106,000 new entrants in the labor market, down significantly from the 380,000 added in the past three months.
In response to the latest data release from the Bureau of Labor Statistics, Trump said on August 1: “Jerome: “Too late” Powell is a disaster. I’ll drop the fee! The good news is that tariffs are bringing billions of dollars into the US! ”
A few days later, he fired Statistics Director Erica Mantelfer, accusing her agency of “false” employers, raising concerns about the integrity of official US data.
Powell showed that a sharp drop in fees is unlikely to occur at the next FOMC meeting in September due to prolonged concerns about the inflationary effects of Trump’s tariff policies that raise U.S. import costs.
The Fed Chair is currently facing a tough, balanced act of trying to achieve stable inflation and strengthen the labour market. The conflict has led to a fierce debate among the Fed governors about the best path for our monetary policy.
Two Trump-appointed policymakers, Michelle Bowman and Christopher Waller, split up with Powell at their last FOMC meeting in July by helping them cut interest rates by a quarter point. Instead, the fees were stable.
For now, Powell is facing a difficult battle to build a consensus on how much monetary policy will be relaxed as a chair for the rest of the meetings.
Janius Karsten said, “I hope that Trump’s loyalty will replace Powell next year.”
He said, “It could pose risks to constructive debate at the Fed. Things could be bumpy if Trump nominated an outsider or a non-traditional central banker. That could prove an experiment in monetary policy.”
