WASHINGTON, DC – NOVEMBER 02: U.S. President Donald Trump (R) introduces his nominee for the chairman of the Federal Reserve Jerome Powell during a press event in the Rose Garden at the White House, November 2, 2017 in Washington, DC. Current Federal Reserve chair Janet Yellen’s term expires in February. (Photo by Drew Angerer/Getty Images)
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After criticizing Federal Reserve Chair Jerome Powell for months, President Trump is attempting to remove a Fed governor, Lisa Cook. Cook intends to remain in her position and has submitted a court filing on Tuesday “in her official capacity as a member of the Board of Governors of the Federal Reserve System and her personal capacity.”
Attempt To Remove Cook
Trump released a letter to Lisa Cook, writing, “The Federal Reserve Act provides that you may be removed, at my discretion, for cause. See 12 U.S.C. § 242. I have determined that there is sufficient cause to remove you from your position.” and that, “there is sufficient reason to believe you may have made false statements on one or more mortgage agreements.”
The statements regarding the mortgage applications came from within the Trump administration, rather than a court verdict, and it is unclear that this issue rises to the level of removing a Federal Reserve governor for cause under the Federal Reserve Act, an issue that the Supreme Court mentioned in May.
Cook’s Response
Cook has refused to resign, saying Trump’s claims are without merit. An emailed statement from her lawyer stated: “I will continue to carry out my duties to help the American economy as I have been doing since 2022.”
Supreme Court Suggests Some Fed Protections
The Supreme Court wrote on an Emergency Application for Stay in May, and specifically mentioned protections for members of the Federal Reserve:
“Finally, respondents Gwynne Wilcox and Cathy Harris contend that arguments in this case necessarily implicate the constitutionality of for-cause removal protections for members of the Federal Reserve’s Board of Governors or other members of the Federal Open Market Committee.” … “We disagree. The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.”
Implications of Removing Cook
As when Trump attempted to remove Powell earlier in the year, the markets appear potentially concerned at the prospects that Cook will be removed, with the dollar weakening slightly on the news.
Central bank independence is typically viewed as a positive by markets and has been a global trend according to research by Davide Romelli at Trinity College Dublin. That’s because independence arguably allows monetary policy to be set by experts with a longer term view. Politicians can prefer lower interest rates because of the short-term benefit it can bring to an economy. However, economists often argue that short-term pressure for low interest rates can lead to higher inflation over the longer term, creating a self-defeating policy approach.
Almost 600 economists have signed an open letter in support of Cook. “We write as economists to express our strong support for Federal Reserve Board Governor Lisa Cook and for the longstanding principle of central bank independence,” the letter said. “Good economic policy requires credible monetary institutions. Credible monetary institutions, in turn, require the independence of the Federal Reserve. A large body of research confirms that countries with more independent central banks achieve better economic outcomes.”
If Cook were removed, as with Adriana Kugler’s recent resignation, Trump would nominate a replacement. However, such an appointment may not necessarily materially alter monetary policy. That’s because the Federal Open Market Committee has 12 voting members. Therefore, at least seven votes are needed to drive any interest rate decision, and decisions historically have typically been made largely via consensus.
The full length of a Federal Reserve Governor’s term is 12 years, giving Trump limited opportunity to shape the FOMC as a whole. Still, Trump’s attacks on the FOMC are becoming increasingly unique in a historical context.
What To Expect
Regardless of the outcome of a potential legal battle between Trump and Cook, it appears likely that the FOMC will vote to lower interest rates this month and progressively lower rates thereafter. To the extent Trump continues to challenge the independence of the FOMC by pushing for lower interest rates, that may prove a concern for financial markets.
