President Donald Trump’s recent attempt to fire a member of the Federal Reserve’s governing board has raised significant concerns among economists and legal experts regarding the central bank’s independence.
This action is being viewed as one of the most severe threats to Fed independence in decades, potentially impacting the everyday lives of most Americans.
Economists warn that if Trump succeeds in his goal of installing a more compliant Fed that aggressively cuts short-term interest rates, it could lead to heightened inflation and, over time, increased borrowing costs for mortgages, auto loans, and business loans.
On Monday, Trump announced his intention to dismiss Lisa Cook, who holds the distinction of being the first Black woman appointed to the Fed’s seven-member Board of Governors.
This incident marks an unprecedented move in the Fed’s 112-year history, as it represents the first instance of a sitting president attempting to remove a governor.
The Independence of the Fed ‘Hangs by a Thread’
Trump, alongside members of his administration, has not concealed their desire for greater control over the Federal Reserve.
He has made repeated demands for the Fed to lower its key interest rate to as low as 1.3%, a significant drop from the current rate of 4.3%.
Prior to attempting to remove Cook, Trump had already made headlines by launching attacks against Fed Chair Jerome Powell, criticizing him for not implementing sufficient rate cuts and hinting at the possibility of firing him as well.
“We’ll have a majority very shortly, so that’ll be good,” Trump stated on Tuesday, referring to his potential ability to replace Cook and thereby gain a dominant 4-3 vote control over the Fed’s board.
Jon Faust, an economist at Johns Hopkins and a former advisor to Powell, commented that the situation surrounding Governor Cook, while specific, exemplifies a broader trend in the ongoing assaults on the Federal Reserve’s autonomy.
In Faust’s view, “Fed independence really now hangs by a thread.”
While some economists believe that the Fed should act more decisively in cutting rates, nearly all concur with Powell’s more modest expectations of a quarter-point reduction in September, rather than a drastic three-point cut as Trump has suggested.
Understanding Fed Independence
The Federal Reserve has substantial influence over the U.S. economy.
By reducing the short-term interest rate under its control, the Fed can make borrowing cheaper, thereby stimulating spending, economic growth, and job creation.
Conversely, increasing the rate to combat rising inflation can suppress economic activity and potentially lead to job losses.
Many economists advocate for the independence of central banks due to their ability to pursue unpopular policies that elected officials might avoid for fear of political backlash.
Research indicates that nations with independent central banks usually experience lower long-term inflation rates.
However, elected leaders, such as Trump, are often inclined to push for lower interest rates to satisfy immediate economic needs, promoting easier home and vehicle purchases and bolstering the economy in the short term.
Potential for Increased Inflation
Douglas Elmendorf, an economist at Harvard and former director of the nonpartisan Congressional Budget Office, expressed concern that Trump’s request for a 3-percentage-point cut in the Fed’s key rate would overstimulate the economy.
This overstimulation could lead to consumer demand surpassing the economy’s productive capacity, resulting in higher inflation, analogous to the situation during the COVID-19 pandemic emergency.
“If the Federal Reserve falls under control of the president, then we’ll end up with higher inflation in this country probably for years to come,” Elmendorf warned.
Although the Fed controls short-term rates, financial markets determine longer-term borrowing costs for loans such as mortgages.
If investors suspect that inflation will remain elevated, they may seek higher yields on government bonds, which can elevate borrowing costs throughout the economy.
Comparatively, in Turkey, President Recep Tayyip Erdogan compelled the central bank to maintain low interest rates during the early 2020s, leading to inflation rates soaring to 85%.
After allowing greater central bank independence in 2023, Turkey saw inflation decrease, but short-term rates surged to 50% to battle inflation, with current rates still standing at 46%.
Historical Precedent of Presidential Pressure on the Fed
While other U.S. presidents have criticized the Fed, none have gone as far as Trump in seeking to remove a sitting governor.
President Lyndon B. Johnson pressured then-Fed Chair William McChesney Martin in the mid-1960s to keep rates low to support extensive government spending on the Vietnam War and antipoverty initiatives.
Similarly, President Richard Nixon pressed then-Chair Arthur Burns to avoid raising rates before the 1972 election.
Both episodes are often cited as contributing to the persistently high inflation experienced in the 1960s and 1970s.
Trump has argued that lowering interest rates would facilitate easier financing of the federal government’s substantial $37 trillion debt.
This approach risked diverting the Fed from its congressional mandates of maintaining low inflation and unemployment levels.
The Balancing Act of Independence and Accountability
While presidents can influence the Fed through their appointment power, these positions require Senate approval and are designed to be insulated from immediate political pressures.
Fed governors serve staggered 14-year terms to limit any single president’s ability to make a dominant number of appointments.
Jane Manners, a law professor at Fordham University, highlighted Congress’s intention in establishing independent agencies like the Fed.
Lawmakers preferred decisions based on objective expertise rather than those dictated by political pressures.
However, some Trump administration officials argue for enhanced democratic accountability within the Federal Reserve.
In an interview with USA Today, Vice President JD Vance contended, “What people who are saying the president has no authority here are effectively saying is that seven economists and lawyers should be able to make an incredibly critical decision for the American people with no democratic input.”
Stephen Miran, a senior economic advisor in the White House, previously advocated for restructuring the Fed to simplify the process for a president to dismiss governors in a paper he authored last year.
The ultimate goal of Miran’s proposal, as he stated, is to achieve the economic benefits that arise from an independent central bank while ensuring the accountability that a democratic society mandates.
Trump has nominated Miran to the Fed’s board to fill the vacancy created by Adriana Kugler’s unexpected departure on August 1.
Future Uncertainty for the Fed
Trump’s justification for wanting to remove Cook centers around allegations made by one of his advisors that she committed mortgage fraud.
Cook has filed a lawsuit seeking to block her firing, claiming that the allegations serve as a pretext for Trump’s broader intentions to exert control over the Fed.
A court is anticipated to decide this week on whether to temporarily prevent Cook’s dismissal while the legal proceedings continue.
The claims against Cook involve alleging that she declared two properties as primary residences in July 2021, prior to her appointment to the Fed board.
This could have permitted her to secure a lower mortgage rate than she might have received if one property had been classified as a second home or investment property.
While Cook suggests that the allegations may stem from a clerical error, she has not directly responded to the specific accusations.
Beyond Cook, Trump has directed personal invective at Powell for months; however, his administration is now concentrating more on the structural organization of the Fed.
The Fed’s interest rate decisions are made by a committee that includes the seven governors, including Powell, alongside the 12 presidents of regional Fed banks located in cities such as New York, Kansas City, and Atlanta.
Each meeting has five of those presidents voting on rates, with the New York Fed president holding a permanent vote while four others rotate in voting.
Although the reserve banks’ boards appoint their presidents, the Fed board in Washington maintains the authority to reject these appointments.
In February, all 12 presidents are scheduled for reappointment and approval by the board, which could become increasingly contentious if the board opposes one or more of those presidents.
Changing the reappointment process for reserve bank presidents and disrupting the fundamentally cooperative structure could represent a ‘nuclear scenario,’ as per Adam Posen, president of the Peterson Institute for International Economics.
Such an overhaul would signal that the Fed is truly veering off course.
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