If Cook is displaced by a Trump loyalist, and assuming his nomination of the chair of his Council of Economic Advisers, Stephen Miran, to fill a vacancy on the board is confirmed, four of the seven Fed governors would be Trump appointees.
That the targeting of Cook is just a means to an end was made clear in comments Trump made to his cabinet on Tuesday.
“That will be great once we have a majority, and housing is going to swing, and it’s going to be great.” Trump has said repeatedly that he wants the Fed to cut its policy rate by three percentage points.
The allegations against Lisa Cook, whether true or not, are a pretext to remove a Fed governor in order to replace them with someone Trump would expect to follow his directives.Credit: Bloomberg
Gaining a majority on the Fed’s board (assuming his nominees will do what he tells them to do) would also give Trump the power to remake the body that actually decides US monetary policy, the 12-member Federal Open Market Committee (FOMC).
The FOMC’s membership includes the seven Fed governors, the president of the New York Fed and the presidents of four of the Fed’s 12 regional banks, who serve on a rotating basis. The appointment of the regional presidents is authorised once every five years, with the next authorisation due in February.
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If Trump can seize control of the Fed’s board, his representatives could veto appointments until he gained a FOMC that would do his bidding. He would effectively have seized control of the Fed and its interest rate decision-making.
Thus, Cook’s fate has extraordinary significance for the Fed’s independence and its ability to operate, as it was established to do, without regard to short term political cycles.
That independence is fundamental to the Fed’s credibility, the functioning of the US bond market – the most important market within the global financial system – and the US dollar’s status as the world’s reserve currency.
Trust that the Fed is acting apolitically is of great consequence to both the US and global financial systems and economies, regardless of whether, with hindsight, its decisions are regarded as having been right or wrong.
Trump’s claim that he has fired Cook begs the question of whether he has the authority to remove her from the board.
Trump’s push has serious implications for the global financial system.Credit: Bloomberg
The allegation that she has committed mortgage fraud is just that, an allegation. It hasn’t been tested, she hasn’t been charged and there have been no court proceedings yet.
Even if the allegation were proven, there is a question mark over whether it would amount of a “cause” for her sacking.
Cause, in the context of the Fed’s governors – the US Supreme Court has singled out the Fed as a uniquely structured, quasi private entity whether there is a higher bar for sackings than other agencies – is generally thought to involve some form of significant wrongdoing or malfeasance relating to their role within the institutions.
So, Trump is jumping the gun in claiming to have removed Cook from the board and in saying that he is going to move quickly to nominate her replacement, raising the prospect of shifting Miran from a seat who’s term expires in January to Cook’s, which is scheduled to run until 2038. (The governors, appointed on a staggered basis, serve 14-year terms, an attempt by Congress to distance them from political cycles).
Whether, or not, Cook can successfully challenge her sacking, Trump’s actions provide their own challenge to the Fed’s chair, Jerome Powell, and his fellow governors.
Whether, or not, Cook can successfully challenge her sacking, Trump’s actions provide their own challenge to the Fed’s chair, Jerome Powell, and his fellow governors.
Powell has to decide whether Cook should remain in place until the allegations are proven, or dismissed. The Fed has said it has deferred any decision on her current status, although it also said it would abide by any court decision in her challenge to the attempted dismissal.
Until now, Trump’s attacks on the Fed, and Powell in particular, have been verbal and unsuccessful. He tried, but failed, to create a cause for firing Powell by attempting to make him personally responsible for a blow-out in the costs of the renovation of the Fed’s Washington headquarters.
By using other agencies – the Federal Housing Finance Agency and the Department of Justice – to target Cook, he’s also sounded a warning shot to other governors that don’t owe their appointment to him. The regional bank presidents should also be nervous.
If there’s anything in their histories that might make them vulnerable, the full resources of an administration that has weaponised all its key agencies against those seen as resisting Trump’s will, will be deployed to find it. That is intimidating, and no doubt designed to intimidate.
So far, financial markets don’t appear to be too unsettled by Trump’s move. The yield curve in the bond market did steepen a little, but there hasn’t yet been the revolt by bond investors – the “bond vigilantes” – that might be expected in response to a threat to the Fed’s independence.
That might change if Trump does succeed in wresting control of the Fed and, and a time when Trump’s tariffs are just starting to feed into higher prices and into a rising inflation rate, the Fed slashes its policy rate.
The yield curve could be expected to steepen further – the yields on longer-term bonds would rise even as those on short-term bills and notes fell – as investors demanded higher returns for the risk of holding longer duration bonds during a period of potentially heightened inflation.
Foreign investors, for whom the Fed’s independence – along with trust in the rule of law and the US court system, both of which have been undermined since Trump took office – is important and reassuring, might take flight. That would flow through to a lower (even lower) US dollar and, because it would remove demand from the bond market, even higher yields, mortgages rates and US government borrowing costs.
Trump’s opportunism and his attempt to bring another key US institution under his personal control may have been mistimed and counter-productive.
The Fed was already considering whether to lower its federal funds rate at its meeting next month, albeit that it would only be by a quarter of a percentage point and not the three percentage points Trump keeps demanding (and which would definitely blow up the bond market).
Now, a rate cut could be interpreted as the Fed governors and regional presidents succumbing to Trump’s intimidation and responding to political pressure and fears of being targeted personally by the administration.
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The desire to demonstrate their independence and preserve the Fed’s reputation and credibility might be enough to tip the delicate balance between holding rates steady or making the modest cut that the market has priced in.
Whatever they do, it will be seen through a political lens. Trump has already damaged the Fed.
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