President Trump obviously wants to control the Federal Reserve’s monetary policymaking. If he ever does gain control of the Fed, it could endanger the Trump economy, throw markets into a tailspin, and leave Trump’s economic legacy in the basement alongside that of George W. Bush and Herbert Hoover.
Trump’s latest Fed attack is a threat to fire Lisa Cook, one of 12 voting members on the Fed committee that sets interest rates. Trump wants to install loyalists at the Fed who will slash rates and do whatever else he wants. Cook is a Biden appointee who, like Fed Chair Jerome Powell, has voted this year to keep rates steady. Most economists think the Fed has been right to sit tight on rates. Trump clearly disagrees.
Trump thinks he found leverage over Cook because his top housing regulator, Bill Pulte, scoured millions of individual housing records looking for dirt and found that Cook declared two different properties as her primary residence when applying for bank loans. Trump claims that gives him the authority to fire Cook. But there’s no formal charge against Cook, just the Trump-Pulte smear. Cook said she’s staying in her job and will fully defend herself.
Trump has not yet actually moved to fire Cook. He has only said he will do it. So Trump might be floating a trial balloon to see how markets react. But his plan to gain control of the Fed is self-evident. He has repeatedly pressured Powell to resign while nominating loyalist Stephen Miran to the rate-setting committee when Adriana Kugler unexpectedly stepped down in early August. Trump’s broader plan may be to seed the rate-setting committee with friendly members by early next year, when the Fed must select the 12 presidents of the Federal Reserve banks — normally an uncontroversial process.
Read more: How much control does the president have over the Fed and interest rates?
Fed watchers are now debating whether Trump could actually pull enough strings to populate the rate-setting committee with a majority of allies willing to do his bidding. But there’s no debate over how disruptive it would be if Trump pulled it off. “Trump’s efforts to bend the Fed to his will are a genuine threat to US markets,” Capital Economics explained in an Aug. 26 analysis. “Prolonged attacks risk pushing up long-term bond yields while weighing on the value of the dollar and potentially equity prices.”
Markets have already registered a negative reaction. Long-term interest rates rose slightly on news of Trump’s plan to fire Cook, while the value of the dollar dipped. Those moves indicate greater worry about inflation due to bad Fed decision making. The moves were modest, but that may be partly because Cook hasn’t left, and the Fed, for now, remains independent.
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The Fed is far from perfect, but it is the world’s most powerful financial institution and a key factor in the US economy’s routine outperformance, compared with other advanced nations. Rating agency S&P Global repeatedly cited the Fed’s independence as a standout feature of the US economy in a recent update on its US credit rating. In an obvious reference to Trump, S&P said it could lower the US credit rating “if political developments weigh on the strength of American institutions and the effectiveness of long-term policymaking or independence of the Federal Reserve.”
Federal Reserve Chair Jerome Powell, left, talks with Board of Governors member Lisa Cook during an open meeting of the Fed’s Board of Governors on June 25 in Washington, D.C. (AP Photo/Mark Schiefelbein, File) ·ASSOCIATED PRESS
Markets would render their judgment much faster than any rating agency if Trump did manage to co-opt the Fed. Trump has said he wants the Fed to slash interest rates by two or three percentage points, which would be a dramatic move that typically only happens during economic emergencies. Trump wants lower rates to stimulate an economy that is slowing due to his tariffs and immigration policies. He also wants the government to be able to borrow at lower rates, to help cut federal interest payments and annual deficits.
The problem with lower rates is that cheaper money gooses spending, which can make inflation worse if prices are already elevated — which they are now. The main reason the Fed hasn’t been cutting rates is that excessive inflation of the last four years may still be a problem. Inflation fell from a peak of 9% in 2022 to a low of 2.3% in April. But it has ticked back up to 2.7% and many economists think Trump’s tariffs will push it to around 3.5%. The Fed normally wants inflation of 2% or so and is reluctant to cut rates if inflation is much above that.
Read more: How jobs, inflation, and the Fed are all related
Even so, Powell recently indicated the Fed may be ready to start trimming rates because the labor market is weakening and might need a bit of monetary stimulus. But Powell is talking about a very gradual pace of rate cuts, most likely a quarter-point cut every month or two. Trump wants much faster action. It’s unlikely the Fed would cut by a full three points even during the next year or two, unless a recession develops.
The folly of Trump’s pressure on the Fed is that the central bank only controls short-term rates, which, for the most part, only affect banks. The market sets long-term rates such as those on mortgages, car loans, and business loans, and politicians cannot muscle financial markets. In fact, it’s the other way around.
Last fall, the Fed cut short-term rates by a full point during a four-month period. Long-term rates rose by a point during the same timeframe. That was unusual, but also logical. At the time, bond investors expected higher future interest rates and higher future inflation, so they demanded higher rates on longer-term bonds to compensate for those risks. There were also concerns about the massive amount of US government debt coming into markets to finance persistent deficits. Those concerns generally remain.
Read more: What is inflation, and how does it affect you?
If investors lose confidence in the Fed’s ability to manage inflation, long-term rates have nowhere to go but up. That’s why Terry Haines, founder of Pangaea Policy, calls Trump’s attack on Cook an “own goal misfire.”
“Sustained lack of market confidence could well manifest in more debt and deficit pressures, destabilizing Trump’s entire economic policy priorities at a moment of great geopolitical peril for the US,” Haines wrote to clients in an Aug. 26 newsletter.
Higher rates normally bring lower stock values, slower economic growth, and less hiring. Businesses and consumers that have to pay more to borrow will simply borrow less, which means less economic activity. Higher borrowing costs ding corporate profits, which pass through to lower stock values. All of this creates more risk, making everybody more reluctant to spend. It may not add up to recession, but stagflation is bad enough to bum everybody out.
Trump has a few cool economic heads in his court of otherwise sycophantic advisers, such as Treasury Secretary Scott Bessent, who must be telling Trump that a central bank at his beck and call would be a lot less helpful than the Fed as it is now. An independent Fed really does have the president’s back, because its entire job is to keep the economy stable. A politically expedient Fed could become feckless because nobody would trust it, and not even the Fed can muscle markets into doing what the president wants. If Trump’s threat to fire Cook really is a trial balloon, it’s a Hindenberg bound to explode.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
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