Introduction to the Conflict
Donald Trump’s attempts to control various aspects of American life have led to disagreements with several institutions, including the global economy, the Federal Reserve, and one of its governors. The Federal Reserve, also known as the Fed, is the central bank of the United States, responsible for setting the nation’s monetary policy. Its dual statutory goals are to maximize nationwide employment and protect the value of the U.S. dollar.
The Disagreement Over Interest Rates
The disagreement between Trump and the Fed revolves around interest rates. Trump wants the Fed to lower interest rates to lessen the political fallout from his tariffs, which have caused unprecedented levels of volatility and uncertainty in the market. However, the Fed is taking a "wait-and-see" approach, choosing not to lower interest rates until it is sure its dual mandate of maximum employment and low, stable inflation can be achieved.
Trump’s Attempt to Fire Fed Governor Lisa Cook
In an attempt to pressure the Fed into lowering interest rates, Trump announced his intention to remove Fed Governor Lisa Cook from office. Cook is the first Black woman to serve on the board of governors, and her appointment can only be terminated by a president for cause. The cause is statutorily defined as "inefficiency, neglect of duty, or malfeasance in office." However, Trump’s reason for removing Cook is based on unsubstantiated accusations from a Trump ally that Cook made false statements on a mortgage application in 2021, before she joined the Federal Reserve.
The Consequences of Politicizing the Fed
If the Fed were to fall under the influence of Trump or any other elected official seeking to tie interest rates to their political agenda, the economic consequences would be dire. Investors would face heightened market volatility due to uncertainty and artificially manipulated interest rates, causing confidence in U.S. assets to drop. The Fed’s independence is crucial in maintaining fiscal autonomy and preventing administrations from using monetary policy for self-serving political ends.
Cook’s Lawsuit Against Trump
Cook is fighting back against Trump’s attempt to fire her. In a civil suit filed on August 28, she stated that the attempted firing violates her due process rights, as well as the Federal Reserve Act. Seeking an emergency injunction to block her firing and confirm her status as a member of the Fed’s governing board, Cook’s attorneys argued that "[t]he President’s effort to terminate a Senate-confirmed Federal Reserve Board member is a broadside attack on the century-old independence of the Federal Reserve System."
The Supreme Court’s Involvement
The suit seems destined for the Supreme Court. In May, the court reiterated the Fed’s independence in Wilcox v. Trump, ruling that "the Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States." The justices distinguished the operational independence of the Fed from that of other quasi-independent agencies. Justice Elena Kagan, in a dissenting opinion, pointed out that Congress intended to vest a certain amount of independence among all executive agencies, removing them from a president’s whim.
The Definition of "For Cause"
Cook conceded that the "for cause" standard is not defined in the statute that created the Fed, but she explains how statutes establishing the standard in other independent agencies expressly limit "for cause" terminations. There must be a specific finding of "inefficiency, neglect of duty, or malfeasance in office." The historical use of these terms indicates that "neglect of duty" means failing to perform one’s duties in a way that caused specific harm to the entity involved, "malfeasance" connotes the commission of an unlawful act in the performance of one’s official duties, and "inefficiency" targets concerns about "waste," especially from self-interested dealing.
The Risks of Politicized Central Banking
Trump’s threats have already jeopardized the Fed’s goals, destabilizing global markets and eroding trust in U.S. markets and fiscal autonomy. AInvest reported early market responses to his threats, including fixed income markets shifting toward inflation hedges, higher borrowing costs, and sectoral rebalancing in the markets. The Fed’s independence remains critical to global stability, as political interference risks undermining dollar dominance and triggering cascading effects on bond yields and equity valuations.
Conclusion
In conclusion, Trump’s attempts to control the Fed and manipulate interest rates for political gain pose significant risks to the economy. The Fed’s independence is crucial in maintaining fiscal autonomy and preventing administrations from using monetary policy for self-serving political ends. If left unchecked, Trump’s short-sighted and self-serving economic impulses could lead to total economic collapse. The Supreme Court’s involvement in the dispute between Trump and Cook will be crucial in determining the fate of the Fed’s independence and the future of the US economy.
