Fed’s independence still in jeopardy even as governor Lisa Cook stays in job for now
Analysts say that an ouster by Trump would undermine trust in an institution that lies at the heart of the trust-based financial system
THE Supreme Court has given US Federal Reserve governor Lisa Cook, and possibly, the global financial system, a much-needed stay of execution for now.
For weeks, US President Donald Trump has been trying to fire Cook from her position as a governor – the first time the White House has made such an attempt in the roughly 112 years that the position has existed.
The top US court on Oct 1 refused to greenlight the firing, opting for an amber light instead with its request to hear oral arguments in January 2026.
Trump is citing an alleged false statement in a mortgage document as the basis for his actions. The Supreme Court said it will hear arguments in January as to whether those grounds meet the statutory standard that only permits dismissal of Fed governors “for cause”.
The Federal Open Market Committee (FOMC) consists of 12 members – the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis.
The governors are nominated by the president of the US, and then confirmed by Congress to sit for 14-year terms. The term length is intended to allow for stability and long-term thinking on the board.
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Cook was nominated by former president Joe Biden in 2022, and she became the first black woman on the Fed’s board.
Analysts said an ouster by Trump would undermine trust in an institution that lies at the heart of the trust-based financial system.
“Trump is trying to gain more influence over the Fed’s board of governors and the FOMC with the unprecedented action of firing Cook over an unsubstantiated allegation of mortgage fraud,” said analysts at New York-based brokerage Telsey Advisory Group.
In her legal challenge to Trump’s ouster, Cook’s lawyers warned of market chaos should she be removed in this fashion.
The lawyers warned that a finding in favour of Trump would be the “death knell for the central-bank independence” that has been critical to the establishment of the world’s largest economy.
Trump’s ulterior motive is quite clear to most. He wants the Fed board to be used as another weapon in his own economic arsenal. In the short term, Trump is likely correct in thinking that cutting interest rates would guarantee an expansion during the remainder of his reign.
As Fed chair Jerome Powell and others have argued, however, the Fed must also keep an eye on longer-term inflation risks – and on the potential inflationary impact of Trump’s tariffs.
If the central bank cuts rates too aggressively, the extra money that Americans derive from cheaper loans and more abundant jobs will be swallowed by inflation.
“Trump has essentially usurped the Fed’s forward guidance function for the time being by telling markets that lower rates are coming, which is being manifested in a steeper yield curve, with short-term Treasuries dropping like a rock,” said Jamie Cox, managing partner at money manager Harris Financial Group.
The scope to which the market fears the undermining of the Fed’s independence was clear in July when stocks plummeted following Trump’s vow to oust Powell.
Trump later revoked the threat, though he sustained a pressure campaign on Powell and pushed for interest rate cuts.
Trump has already installed one of his own men as a governor on the Fed’s rate-setting committee. In another unprecedented development, Stephen Miran was confirmed as a member on the Fed’s board of governors without giving up his job as a White House economic adviser. Miran has duly advocated for the bumper rate cuts that Trump has been demanding for since his re-election nearly a year ago.
In recent history, only the Fed has demonstrated the power to calm global markets when panic strikes. Government interventions, emergency deals and white-collar court cases were futile during the dotcom crash, the 2008 financial crisis and the Covid-19 pandemic.
The source of the Fed’s power is trust. The Fed has seldom needed to even lend money to private banks – the sums that institutions borrow at the central bank’s “discount window” are a tiny fraction of the amounts they lend to one another every day.
All the Fed has to do is convince the banks and financial institutions that it is there as a lender of last resort, if all else fails.
In theory, the banks don’t even base the rates at which they lend money on the Fed’s benchmark rate. Usually, banks set rates based on the level of Treasury yields at which their reserves are earning interest. Those yields are determined on the open market, based on a variety of factors.
But the Fed’s benchmark rate has traditionally been the most important one. In recent years, Treasury yields – and hence, mortgage and auto-loan rates – have come down when the Fed is cutting rates. That, too, is simply a reflection of the broad market’s trust in the Fed.
The reason that markets and banks trust the Fed is the central bank’s reputation, forged during the Alan Greenspan era of being an independent monitor of global markets. Only the Supreme Court itself can compare as a Washington institution with a dignified aura whose word is final in its sphere.
All three living former Fed chairs – Greenspan, Ben Bernanke and Janet Yellen – signed a brief filed with the Supreme Court supporting Cook’s defence, warning that the central bank’s independence was in jeopardy.
The fact that the Supreme Court requested a hearing before making a decision indicates that the justices view the Fed as entitled to more independence than other agencies, where the court has allowed Trump to make similarly abrupt personnel moves.
As Powell has stated many times since Trump’s re-election, Fed officials are specifically forbidden from working with the legislators and executive leaders in charge of fiscal policy.
The sole focus of the central bank is the “dual mandate” – maintaining price stability and labour-market growth, and using all data and monetary-policy tools at their disposal to those ends.
Trump’s efforts to fire Cook and to undermine her boss, Powell, are seen by many as an attempt to destabilise the system and cause chaos in the market. Come January, the world will discover if the US central bank can emerge unscathed.
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