Trump Puts Federal Reserve Independence Under Increasing Threat

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By Nicholas Larsen, International Banker

“Pursuant to my authority under Article II of the Constitution of the United States and the Federal Reserve Act of 1913, as amended, you are hereby removed from your position on the Board of Governors of the Federal Reserve, effective immediately,” US President Donald Trump wrote in a letter to Federal Reserve Governor Lisa Cook, which he then posted on his Truth Social account on August 26. Although the Supreme Court has since intervened to keep Cook in her position for the time being, Trump’s attempt to remove her represents the latest in a growing list of actions by the US president to influence the central bank. As such, the Federal Reserve’s (the Fed’s) independence appears to be under grave threat.

Trump claimed the firing was because Cook, who was appointed under the previous administration of President Joe Biden, had lied on a mortgage application before becoming a governor. Cook, however, contended that the decision stemmed from her stance on monetary policy. Indeed, the governor’s swift response to her firing was to sue the Trump Administration in an effort to overturn the president’s decision. “The 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,” Cook’s lawyer, Abbe David Lowell, wrote in a court filing.

That independence can largely be traced to the Banking Act of 1935, which mandated that the central bank’s monetary-policy decisions would remain beyond presidential control. Only a Congressional move or a Supreme Court ruling could change this dynamic and boost political influence over monetary policy. By law, a president can fire a Fed governor “for cause”, but that term remains undefined, and no procedure has been established for such a removal.

“The importance of that independent monetary policy is multifaceted. First, it shields the Federal Reserve from undue political influence, such as pressure from the White House to lower interest rates ahead of an election, which could offer short-term political gains but cause long-term economic harm,” according to the Council on Foreign Relations (CFR). “Second, independence enhances the Fed’s credibility and fosters market confidence in its decisions. Crucially, it also empowers the Federal Reserve to take difficult but necessary actions, even when they are unpopular.”

Many believe that independence is steadily eroding, with economists voicing concerns that White House control over the central bank’s monetary policy will lead to lower interest rates than needed to fuel economic growth. The fallout from such a move would likely include skyrocketing inflation, substantial losses in domestic and international confidence in US markets, and ultimately higher long-term interest rates.

Despite being responsible for appointing Jerome Powell as the Fed’s chair in 2018, Trump has frequently expressed his frustration with the Powell regime for its refusal to lower interest rates. After Trump’s “liberation day” on April 2, which saw a raft of import tariffs being announced against virtually all US trading partners, he wrote on social media: “This would be a PERFECT time for Fed Chairman Jerome Powell to cut Interest Rates. He is always ‘late,’ but he could now change his image, and quickly.”

Indeed, the US president has even discussed with lawmakers the possibility of firing Powell, although he appears to have cooled on pursuing this option following public outcry. Trump has also named Stephen Miran, chair of the White House’s Council of Economic Advisers, to fill a role on the Fed’s Board of Governors. Miran previously supported Trump’s demand for lower rates and has also co-authored a paper calling for an overhaul of the Fed that would reduce its independence.

“Knowing that the rates will be based on well-researched data, and not political whims, assures the world that the US economy will remain relatively stable and its markets will remain rational—barring unexpected occurrences. Few foreign investors want to risk their money in a volatile, unpredictable environment,” according to the Center for American Progress (CAP), an independent, non-partisan policy institute. “It is no wonder that as President Donald Trump tries to take the unprecedented step of firing a Fed governor and sends other signals that he wants to control monetary policy, experts across the political spectrum are sounding the alarm.”

Those “experts” include the president of the European Central Bank (ECB), Christine Lagarde, who has warned that Trump’s attempts to undermine the Fed’s independence collectively represent a “very serious danger” to the global economy, with the US central bank being forced to succumb to political interests likely to have a “very worrying” impact on domestic and global economic stability. The Bank of England’s (BoE’s) governor, Andrew Bailey, echoed Lagarde’s comments, describing Trump’s threats to Fed independence as “very serious” and a “very dangerous road to go down”. “The Federal Reserve is the central bank for the world’s largest economy. It is a leading central bank,” Bailey told the United Kingdom’s Treasury Select Committee in early September. “It has built up a very strong reputation for independence and its decision-making, so this is very concerning.”

The head of Germany’s Deutsche Bundesbank, Joachim Nagel, meanwhile, urged Europe to voice its support for the Fed, describing Trump’s call for rate cuts and attempts to fire Cook as “not acceptable”. “We have to speak up here,” Nagel said, adding that European leaders are “too quiet, too reluctant, too diplomatic”. As such, Trump’s actions are “undermining the cornerstone of our system, our democracy, our joint values. And so I believe that maybe you have to be a little bit more loud here.”

A recent survey conducted by Deutsche Bank of 62 investors based mainly in the United States and Europe found that 41 percent of respondents see an erosion of the Fed’s immunity from political influence as being “somewhat likely”, while 21 percent expect such an outcome as “very likely.” “This mix of outcomes entails trade-offs—e.g., stronger growth and higher equities vs. higher inflation and yields—though […] almost all respondents see Fed independence as highly important to achieving good economic outcomes,” the Deutsche Bank analysts stated. “Respondents think that the best expressions in financial markets of a loss of Fed independence would be in higher gold prices, steeper yield curves, higher breakeven inflation rates and a weaker dollar.”

The Fed even issued a statement to reassert its independence after Powell met with Trump at the White House in late May. “Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook,” the statement read, which also confirmed that Powell told Trump that he and other Fed officials “will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective, and non-political analysis.”

In early October, the Supreme Court of the United States ruled that Cook could remain in her position as a Fed governor for the time being. Cook’s legal representatives hailed the ruling, stating that it “rightly allows Governor Cook to continue in her role on the Federal Reserve Board, and we look forward to further proceedings consistent with the Court’s order”. Nonetheless, Trump’s attack on Cook could be a sign of things to come for the Fed, which may continue to come under fire repeatedly should its monetary policy not align with the White House’s political desires.

“If Cook goes, Trump will soon have appointed four of the central bank’s seven governors—a majority. This wouldn’t immediately allow him to exert control over the Federal Open Market Committee, whose 12 voting members set monetary policy. It would, though, provide the president with more leverage,” Bill Dudley, former president of the Federal Reserve Bank of New York, explained in a Bloomberg article. “The Board of Governors could, for example, refuse to reappoint some or all of the 12 regional Federal Reserve Bank presidents, whose five-year terms come up for renewal in February 2026—and five of whom vote on the FOMC on a rotating basis. In theory, this could be a way to populate the FOMC with members that would do Trump’s bidding, empowering the president to get the big rate cuts he seeks.”