US President Donald Trump announced on Monday that he is firing Federal Reserve Governor Lisa Cook, escalating his conflict with the independent central bank. Trump posted a letter on his Truth Social platform accusing Cook of mortgage fraud — a claim made last week by Bill Pulte, a Trump-appointee to the Federal Housing Administration, which oversees mortgage giants Fannie Mae and Freddie Mac. Cook has publicly refused to step down.
Trump has also repeatedly criticised Fed Chair Jerome Powell for not lowering short-term interest rates, going so far so as to even threaten him with firing. Powell, who is set to speak Friday at the Jackson Hole economic symposium, has said the Fed is monitoring how Trump’s tariffs might push inflation higher in the US. Analysts believe Powell’s cautious stance frustrates Trump, who wants borrowing costs cut to boost the American economy and reduce government debt interest payments.
Trump also accused Powell of mismanaging a $2.5 billion renovation project for the Fed headquarters.
Why Fed Independence Matters
The Federal Reserve wields enormous influence over the American economy. By adjusting short-term interest rates, the bank can either encourage borrowing and spending to stimulate growth or cool the economy to fight inflation. Economists generally support a politically-independent Fed because it can take unpopular but necessary steps like raising rates that elected officials might avoid, according to The Associated Press.
The importance of this independence was reinforced by the inflation crisis of the 1970s and early 1980s. Then Fed Chair Arthur Burns faced pressure from President Richard Nixon at the time to keep rates low before the 1972 election, which Nixon won handily. Reports suggest Burns’ reluctance to raise rates at the time contributed to prolonged inflation.
Paul Volcker, who was appointed as Fed Chair in 1979 by President Jimmy Carter, had raised interest rates to nearly 20%, triggering a painful recession in the country with an unemployment rate nearing 11 percent. Despite the hardship, inflation fell significantly, showcasing the value of a Fed free from political interference.
Why Investors Prefer Independent Fed
An effort to fire Powell or push out governors like Cook risks rattling markets, analysts say. Stock prices could fall, and bond yields might spike, increasing mortgage, auto loan and credit card borrowing costs. The 10-year Treasury yield is a key benchmark for these rates.
Investors, the report said, prefer an independent Fed because its decisions tend to be relatively more predictable and seemingly focussed on controlling inflation rather than political expediency. Additionally, Fed officials routinely communicate their policy views to this effect, helping markets anticipate moves.
Accountability Without Political Interference
Despite its independence, the Fed is just as accountable. The president appoints Fed governors for staggered terms — up to 14 years for governors and four years for the chair — all of which are ultimately confirmed by the Senate. President Joe Biden had appointed four of the current seven members, including Powell and Cook.
Cook’s term was due to end in 2038, meaning forcing her expulsion now would allow Trump to appoint a loyal replacement. Powell’s chairmanship is set to expire in May 2026, but the Fed’s 12-member rate-setting committee ultimately decides monetary policy.
Congress sets the Fed’s goals, like the “dual mandate” to promote maximum employment and stable prices, defined as two percent inflation. The Fed chair testifies before Congress twice a year to explain policy choices.
Can the President Fire the Fed Chair?
The Supreme Court indicated earlier this year that the president cannot fire the Fed chair simply over policy disagreements but might do so “for cause” such as misconduct. Trump’s administration appears to be exploring the Fed building renovation project as a possible “for cause” justification. Powell would likely contest any firing attempt, potentially taking the fight to the Supreme Court.
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