In a bold move to exert greater influence over the independent institution, Donald Trump terminated Lisa Cook, a Federal Reserve governor, late Monday. This action is seen as a sharp escalation in Trump’s ongoing battle for control. According to a letter posted on Trump’s Truth Social platform, Cook was fired due to allegations of mortgage fraud, as claimed by Bill Pulte, a Trump appointee to the Federal Housing Administration. Cook had previously refused to step down from her position.
Trump has frequently criticized the Fed’s chair, Jerome Powell, for not lowering the short-term interest rate and has even threatened to fire him. Powell, who is set to speak at an economic symposium in Jackson Hole, Wyoming, on Friday, has expressed the Fed’s desire to assess how the economy responds to Trump’s tariffs on imports, which could potentially lead to inflation. Trump has demanded the Fed reduce borrowing costs to stimulate the economy and lessen the interest rates on government debt. He has also accused Powell of mismanaging the US central bank’s $2.5 billion building renovation project.
The dismissal of the Fed chair or the forced departure of a governor poses a threat to the organization’s esteemed independence, which has been supported by most economists and Wall Street investors. This independence allows the Fed to take difficult steps to combat inflation, such as raising interest rates, without political pressure. The importance of an independent Fed was solidified following the prolonged inflation spike of the 1970s and early 1980s, when Arthur Burns, the former Fed chair, faced criticism for succumbing to pressure from Richard Nixon to keep rates low.
Paul Volcker, who was appointed Fed chair in 1979, raised the Fed’s short-term rate to nearly 20% to combat inflation, triggering a recession but eventually bringing down inflation to low single digits. This demonstrates the value of an independent Fed. An attempt to fire Powell would likely lead to a decline in stock prices, higher bond yields, and increased borrowing costs, which would negatively impact mortgages, auto loans, and credit card debt. Most investors prefer an independent Fed, as it manages inflation more effectively and makes its decisions more predictable.
The Supreme Court ruled earlier this year that a president cannot fires the Fed chair simply because they disagree with his policy choices but may remove him “for cause,” typically interpreted as wrongdoing or negligence. The Trump administration has focused on the building renovation project as a potential “for cause” pretext, but Powell is likely to challenge any attempt to remove him, which could ultimately end up in the Supreme Court.
Source: https://www.theguardian.com/business/2025/aug/25/trump-federal-reserve-lisa-cook-explained
