During Trump's first term, he repeatedly pressured the Federal Reserve to cut interest rates; after the start of his second term, his attempts to control the Fed's actions escalated. Recently, he threatened to fire Fed Chair Jerome Powell and this week directly issued a statement to "take action" by dismissing Fed Governor Lisa Cook as a warning to others.
Although Trump's attempt to remove Cook is unprecedented in the 111-year history of the Federal Reserve, it aligns with his consistent style of breaking norms and provoking legal challenges from opponents.
According to Trump's allegations, Cook allegedly misrepresented two properties as her primary residence when applying for a mortgage in 2021, potentially securing more favorable loan terms. These allegations were initially raised by Federal Housing Finance Agency Director William Pulte and have been submitted to the Department of Justice.
In an interview with reporters, Trump stated, "We need 100% innocent people, and she clearly does not meet that standard." He mentioned that he has candidates in mind to replace Cook, but if the court rules that Cook should remain, he will abide by the decision.
Cook is the first Black woman to serve as a governor in the history of the Federal Reserve. She was nominated by former President Biden in May 2022 and took office in September 2023, beginning a 14-year term that will last until January 2038. Before serving as a Fed governor, Cook taught economics at Harvard University and Michigan State University and was a senior economist on the Council of Economic Advisers during the Obama administration.
In terms of monetary policy, Cook is generally considered to be "dovish." She tends to support low-interest-rate policies, advocating for loose monetary policy to promote economic growth and employment while addressing issues of racial and gender inequality in the economy. In principle, Cook's inclinations should align well with Trump's desire for interest rate cuts. Therefore, her dismissal is viewed by many as a political move by Trump, leveraging the controversy surrounding her mortgage application to advance a broader strategy for gaining a majority on the Federal Reserve Board.
Additionally, Cook is not the only government official accused of mortgage fraud. Pulte and Trump have previously targeted political opponents on similar issues, including California Democratic Senator Adam Schiff and New York Attorney General Letitia James. Schiff led Trump's first impeachment trial, while James has sued Trump’s company over alleged financial fraud.
Meanwhile, the Trump administration has faced scrutiny for "selective enforcement." In contrast to the silence regarding Texas Attorney General Ken Paxton, a close ally of Trump who is also involved in mortgage document controversies, Pulte and Trump have not publicly indicated they would investigate Paxton. An earlier investigation by the Associated Press found that Paxton and his wife falsely declared their primary residence in three property loan documents to obtain low-interest loans. However, Pulte and Trump have not announced any intention to investigate Paxton.
During his first term, Trump appointed two current governors, Michelle Bowman and Christopher Waller. If Cook were to leave, Trump would have the opportunity to appoint a majority of the seven-member Federal Reserve Board. Trump has indicated he might consider White House Chief Economic Advisor Stephen Miran to replace Cook, and according to the Wall Street Journal, former World Bank President and long-time Trump ally David Malpass has also been discussed as a potential candidate.
In this regard, Nick Timiraos, a journalist for the Wall Street Journal known as the "New Federal Reserve Correspondent," analyzed in a recent article that Trump has already appointed two members to the Federal Reserve's seven-member board. If he secures two more nominations, he would gain a majority, potentially fundamentally reshaping the entire Federal Reserve system.
Senate Minority Leader Chuck Schumer believes Trump is playing a "block game that pushes the foundation of the American economy to the brink of collapse." He warned that if the White House successfully removes Cook and installs loyalists, the Federal Reserve would lose its status as an independent central bank, threatening the savings and loan rates of all Americans.
In response to the dismissal decision, Lisa Cook has not remained passive; she stated, "As a Federal Reserve governor, I take any questions about my financial history seriously and am gathering accurate information to address any legitimate inquiries and provide facts."
Her lawyer also issued a statement on Tuesday indicating that Cook will file a lawsuit to prevent Trump from firing her. "Trump's attempt to dismiss her based on a recommendation letter lacks factual and legal basis. We will file a lawsuit to challenge this illegal action."
According to the Federal Reserve Act, governors can only be removed for "just cause." Generally, "just cause" typically includes three situations: inefficiency, neglect of duty, and misconduct during their term. The U.S. Supreme Court has previously ruled that the Federal Reserve, as a "structurally unique semi-private entity," grants its governors a high degree of independence, and the president can only exercise removal authority in extreme circumstances.
Currently, Cook has not been formally charged regarding the mortgage document issue, nor has any regulatory or judicial body deemed her actions illegal.
Next, after Cook's lawyer files a lawsuit, the case will first be heard in federal district court. Her lawyer will need to apply for a temporary restraining order to prevent the dismissal from taking immediate effect while seeking a court ruling on whether the president's actions violate the "just cause" standard outlined in the Federal Reserve Act.
Once the district court makes a ruling, the losing party can appeal to the appellate court, and the case may ultimately be decided by the U.S. Supreme Court regarding the legality of the president's dismissal of a Federal Reserve governor. Generally, the entire legal process can take several months, and if it involves urgent rulings or complex legal issues, it may extend beyond a year. During this time, Cook is likely to continue in her role, maintaining her voting rights on the interest rate decision committee, which will still have a tangible impact on market and policy directions.
After the news of Trump's dismissal of Cook broke, concerns about the further erosion of the Federal Reserve's independence led to a new round of sell-offs in dollar assets such as the dollar, U.S. Treasuries, and U.S. stock futures on Tuesday, while the cryptocurrency market also faced pressure but rebounded quickly on Wednesday.
Macro commentator Mel Mattison pointed out that this action could lead to a 1% to 2% drop in related indices in the short term, but if the board is dominated by new members appointed by Trump in the future, it could bring about a loose monetary policy similar to Modern Monetary Theory (MMT), significantly boosting the stock market, gold, and Bitcoin. He predicts that gold prices could exceed $5,000 by the end of 2026, and Bitcoin may reach new highs.
Don Johnson, Chief Economist at MacroEdge, also stated that with the current U.S. deficit nearing $30 trillion, if the Federal Reserve cuts interest rates to 1%, it would further support risk assets and Bitcoin.
Data shows that U.S. durable goods capital orders increased more than expected last month, while the consumer confidence index slightly declined in August.
According to the CME's FedWatch tool, traders currently expect an 85% probability of the Federal Reserve cutting rates at the September meeting. Morgan Stanley also joined the ranks of those predicting a rate cut in September on Tuesday, becoming the latest investment bank to issue such a judgment. Prior to this, several global investment banks had adjusted their expectations following Powell's speech last week, believing that the Federal Reserve might take easing measures next month.
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Original article: “A First in Federal Reserve History! Trump's Dismissal of a Governor Sparks Legal and Market Turmoil”
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