Donald Trump’s efforts to get the US Federal Reserve to cut interest rates are relentless. The US president has already goaded and threatened the Fed chair Jay Powell. This month he nominated his ally, Stephen Miran, to a vacant board slot. On Monday night, he took a more forceful approach. With unproven allegations of mortgage fraud hovering over governor Lisa Cook, Trump saw an opening, and fired her “effective immediately”, citing his powers to remove her “for cause”. Cook claims “no cause exists under the law” to justify her sacking. A court battle is set to ensue.
Whatever the outcome, the assumption that the Fed will set rates based on its own economic judgments has been dealt a severe blow by Trump’s determination to undermine it. The president has recently called for policy rates to go down to 1 per cent, well below their current perch at 4.25 to 4.5 per cent. He may think this will buoy voters and reduce government borrowing costs. But by undermining the central bank’s credibility he risks making the economic situation worse.
The president’s move against Cook — the first Black woman to serve on the Fed’s board of governors — is unprecedented. Even if she is found guilty of falsifying mortgage statements it is unclear if the courts will deem that sufficient for her to be fired. But, if they did, it could erase any notion that the Fed is independent. Cook has been in support of keeping rates on hold in order to parse the price-raising effects of Trump’s tariff policies. The president could replace her with another pliant governor, and use his insiders to undermine other rate-setters.
With more dovish policymakers in place, rates could fall faster than necessary, raising inflation pressures. At Jackson Hole last week, Powell already opened the door to rate cuts as early as September. But with mounting evidence in recent weeks that import duties are raising domestic price pressures, a rate cut is not set in stone. That may, in part, explain Trump’s drastic actions on Monday.
Either way, in the interim, investors are increasingly pricing in the possibility of a captured Fed. Following Trump’s announcement on Cook, 30-year bond yields — which have remained uncomfortably elevated in the president’s second term — nudged higher. The dollar weakened further too. These market moves are ultimately counter-productive for the president. Higher long-term bond yields push up mortgage rates and public borrowing costs. A weak dollar adds to imported price pressures. If households and businesses expect the president will relentlessly undermine the Fed to get rates down, their inflation expectations may increase. That raises the chances of tariff-related price increases becoming entrenched.
That said, some analysts are concerned that investors aren’t taking Trump’s cumulative threats on the Fed’s independence seriously enough. Although bond yields jumped on Tuesday, they eased back somewhat over the course of the day. It is true that the president’s efforts to exert his influence on the Fed still faces hurdles. Cook’s removal and replacement faces legal wranglings. With 12 individuals on the central bank’s rate-setting committee, there are indeed other further checks and balances.
But investors also have shown signs of being lulled into a false sense of security. The Fed’s independence has been dramatically weakened under Trump’s second term, and the direction of travel under his presidency is clear. The move against Cook shows that his administration will leave no stone unturned in its attempts to cut the cost of credit.
Trump should remember that he was elected, in part, on a wave of public loathing for inflation — precisely what he risks letting loose with tighter control of the Fed. Ultimately, more severe market ructions might be what is needed to force Trump to pull back from causing greater damage to the central bank and the US economy at large.