Introduction to the Crisis
For years, Donald Trump had scolded the Federal Reserve, criticized and threatened its chairman Jerome Powell, and demanded that he lower interest rates. His explanation that he would remove the governor of the US Central Bank, Lisa Cook, with "immediate effect" from office brought things to a new level. Experts say that the move is unprecedented and is the most serious threat to the Fed since it became independent almost three quarters of a century ago.
Background to the Conflict
The step comes after a continued pressure campaign by Trump on Powell to lower interest rates, which Trump claims would strengthen the US economy. The replacement of Cook by a loyalist could make the Fed’s seven-member board more likely to vote for Trump’s preference. Trump has already selected three of the seven members. In a letter to Cook, Trump claimed that he had reason to remove her because in 2021 she claimed two properties as her main residence in two separate mortgage documents.
Response to the Removal
Cook has opposed Trump’s attempt to remove her. In an explanation submitted by her lawyer, it says: "President Trump allegedly released me for reasons of the law if there is no matter in the law, and he has no authority. I will not withdraw." Her lawyer described Trump’s step as "illegal" and vowed to fight him in court. Several prominent members of the Democratic Party also said that Trump’s action was illegal.
Implications for the US Economy
Trump’s decision has investors fearing that the pillars of the US economic system are threatened. Several legal and economic experts say that Trump’s step towards the Fed is unprecedented. The independence of the Federal Reserve and central banks in general from political decisions has been considered central to the US’s position as the most powerful economy and the most attractive investment market for many decades.
Impact on the Financial System
The White House’s own economic council emphasized the need for independence from the central bank across political cycles. The ability of the Fed to act independently of political motivations makes it the most credible and able to deal with high inflation. Trust in the US sovereign debts and the long-term future of the economy have been met with skepticism since Trump’s serious tariff announcements in early April. The status of the US dollar as a reserve currency was threatened, and many investors sold, with the currency dropping by around 9% this year.
Immediate Economic and Financial Effects
Long-term US government bonds, which are representative of trust in the US economy in the long term, were slightly sold after the news was announced on Monday. The US dollar was also weak compared to other currencies. However, the overall market reaction has so far been muted. Investors fear that the move is a reflection of Trump’s wish to control the Fed, and trust in US financial institutes continues to be harmed.
Broader Risk to the Global Economy
If Trump succeeds in effectively taking control of the Fed, it will create an undesirable precedent that many central bankers around the world fear. The politically motivated attacks on the Fed have a spillover effect to the rest of the world, including Europe. A loss of independence of the Fed would endanger broader financial instability and lead to significant turbulence on the financial markets. The Federal Reserve’s model of operating free of political interference and the goal of keeping inflation at 2% has been pursued by other central banks around the world.
Comparisons to Other Economic Crises
Comparisons have been drawn between Trump’s move and Turkish President Recep Tayyip Erdoğan’s direct and persistent interventions in the management of the Turkish Central Bank, which were widely held responsible for the country’s continuing economic and financial crisis. Although it is not sure what will happen to Cook, Trump appears closer than ever to controlling the Fed and influencing monetary policy directly. Experts say that unless there is a major reaction on the bond market, there may be no return, and the administration has no reason to change its approach.
