President Donald Trump's decision to fire Federal Reserve Gov. Lisa Cook on Monday night, potentially giving him sway over the nation's monetary policy, managed to keep the S&P 500 underwater for a few afternoons. The bulls regained the upper hand by the afternoon, lifting the index just below its all-time closing high.
For now, investors are much more focused on Nvidia's Q2 earnings report than Trump's power play. But if Trump succeeds in reshaping the Fed, the fallout is likely to grow, possibly sooner than later.
Trump's power play might matter a lot more at the moment if the July jobs report hadn't set off alarm bells about the state of the labor market, leading Fed Chairman Jerome Powell to telegraph a rate cut next month at in his Friday speech in Jackson Hole, Wyo. For now, the macroeconomy and Trump are both pushing policy in the same direction. But that may change, possibly even later this year. A Trump-influenced Fed would be more likely to overshoot on rate cuts and risk higher inflation.
But markets might not wait for a policy mistake. If Trump's firing of Cook stands, investors in long-term U.S. Treasuries may demand a higher risk premium due to waning faith in the Fed.
Cook Firing Would Shift Fed Board
Trump announced the firing of Cook in a Truth Social post on Monday night, saying that "there is sufficient reason to believe you may have made false statements on one or more mortgage agreements." In one agreement she attested to establishing a primary residence in Michigan, Trump said. Two weeks later, she said her primary residence would be in Georgia.
While Trump said the firing was "effective immediately," the Supreme Court confirmed in May that Federal Reserve governors and other members of its monetary policy panel, the Federal Open Market Committee (FOMC), could only be fired for cause, not over disagreements. That implies Trump can't be both prosecutor and judge in Cook's case. Whether she is fairly being fired for cause will have to be established. Cook's lawyer, Abbe Lowell, said she plans to fight Trump's "attempted illegal action."
The Fed has seven governors, all of whom get a vote on the FOMC. If her firing stands and Trump replaces her, that would give him four appointees on the Fed board. Two of those members, Michelle Bowman and Christopher Waller, dissented at the status-quo July 30 meeting, preferring a rate cut.
Earlier this month, Trump announced Stephen Miran, chair of the White House Council of Economic Advisors, as his pick to fill a seat left open by the resignation of Adriana Kugler, a Biden appointee whose term was set to end in January.
Regional Fed Presidents
In addition, five of the 12 regional Federal Reserve Bank presidents get to vote on the FOMC. The head of the New York Fed has a permanent seat on the FOMC. The other four FOMC votes rotate each year among the other 11 Fed district presidents.
All regional Fed president terms last five years and expire at the end of February 2026. Reappointment or replacement requires a vote of the Fed, so a Trump-controlled Fed would put up to five more votes under the White House's influence. But if Cook remains on the Fed through February, Trump will lose his window for wresting full control of monetary policy. Having his own Fed chairman will matter, but that won't necessarily swing a majority of votes.
'Curious' Time For Monetary Policy
In his Friday speech signaling that the door is wide open for a rate cut next month, Powell explained that the labor market "appears to be in balance," but described it as "a curious kind of balance." He said it's "unusual" for both labor supply and labor demand to slow at the same time.
Trump tariffs and the Fed's restrictive interest-rate setting are among the factors holding down job growth. Meanwhile, Powell noted that "the sharp falloff in immigration" has considerably slowed labor force growth. That means the "break-even" rate of job creation needed to hold the unemployment rate steady is also "sharply" lower.
However, if labor force growth remains slow and job growth picks up somewhat while remaining lackluster in historical terms, Trump might push for more additional rate cuts than an independent Fed would want to sign off on. That could keep the Fed's target of 2% inflation out of reach for longer.
S&P 500, Market Reaction
The S&P 500 rose 0.4%, showing little concern that Fed independence, a key underpinning of confidence in financial markets, may be eroding. On Wednesday morning, S&P 500 futures are pointing to a flat open ahead of Nvidia's late-afternoon report.
Markets are now pricing in 86% odds that the Fed will cut its key interest rate by at least 50 basis points this year, up from 82% on Monday. That's a pretty small impact, reflecting both the chance that the courts will overturn Trump's firing of Cook and the potential for regional Fed presidents to resist White House pressure for more easing.
However, the gold futures price has rallied about 1% from were it stood just ahead of his Monday night post announcing Cook's firing.
The 10-year Treasury yield has held steady at 4.28%, even as the 2-year Treasury yield, which is much more closely linked to the Fed policy outlook, has fallen by eight basis points. That has widened the spread between the 10- and 2-year Treasury yields to 63 basis points, which is approaching the biggest gap since January 2022.
Amid the market calm, bond investors are starting to register a bit of concern about Trump's move to assert control over the Fed.
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