Donald Trump has said he is firing Lisa Cook, a Federal Reserve governor, in a move viewed as a sharp escalation in his battle to exert greater control over the independent institution.
Trump said in a letter posted on his Truth Social platform that he is firing Cook because of allegations she committed mortgage fraud. The allegation was made last week by Bill Pulte, a Trump appointee to the Federal Housing Administration, an agency that regulates mortgage giants Fannie Mae and Freddie Mac.
Cook previously said she would not leave her post.
Trump has repeatedly attacked the Fed’s chair, Jerome Powell, for not cutting its short-term interest rate, and even threatened to fire him. Powell, who has previously warned that tariffs will push up inflation, told the Jackson Hole economic symposium in Wyoming last week that the Fed could soon change its policy stance.
Powell’s caution has infuriated Trump, who has demanded the Fed cut borrowing costs to spur the economy and reduce the interest rates the federal government pays on its debt. Trump has also accused Powell of mismanaging the US central bank’s $2.5bn building renovation project.
Firing the Fed chair or forcing out a governor threatens the Fed’s venerated independence, which has long been supported by most economists and Wall Street investors. Here’s what to know about the Fed:
The Fed wields extensive power over the US economy. By cutting the short-term interest rate it controls – which it typically does when the economy falters – the Fed can make borrowing cheaper and encourage more spending, accelerating growth and hiring. When it raises the rate – which it does to cool the economy and combat inflation – it can weaken the economy and cause job losses.
Economists have long preferred independent central banks because they can more easily take unpopular steps to fight inflation, such as raise interest rates, which makes borrowing to buy a home, car, or appliance more expensive.
The importance of an independent Fed was cemented for most economists after the extended inflation spike of the 1970s and early 1980s. Arthur Burns, former Fed chair, has been widely blamed for allowing the painful inflation of that era to accelerate by succumbing to pressure from Richard Nixon to keep rates low heading into the 1972 election. Nixon feared higher rates would cost him the election, which he won in a landslide.
Paul Volcker was eventually appointed chair of the Fed in 1979 by Jimmy Carter, and he pushed the Fed’s short-term rate to the stunningly high level of nearly 20%. (It is currently 4.3%). The eye-popping rates triggered a sharp recession, pushed unemployment to nearly 11% and spurred widespread protests.
Yet Volcker didn’t flinch. By the mid-1980s, inflation had fallen back into the low single digits. Volcker’s willingness to inflict pain on the economy to throttle inflation is seen by most economists as a key example of the value of an independent Fed.
An effort to fire Powell would almost certainly cause stock prices to fall and bond yields to spike higher, pushing up interest rates on government debt and raising borrowing costs for mortgages, auto loans and credit card debt. The interest rate on the 10-year treasury is a benchmark for mortgage rates.
Most investors prefer an independent Fed, partly because it typically manages inflation better without being influenced by politics but also because its decisions are more predictable. Fed officials often publicly discuss how they would alter interest rate policies if economic conditions changed.
If the Fed was more swayed by politics, it would be harder for financial markets to anticipate – or understand – its decisions.
The supreme court in a ruling earlier this year suggested that a president can’t fire the chair of the Fed just because he doesn’t like the chair’s policy choices. But he may be able to remove him “for cause”, typically interpreted to mean some kind of wrongdoing or negligence.
It’s a likely reason the Trump administration has zeroed in on the building renovation, in hopes it could provide a “for cause” pretext. Still, Powell would likely fight any attempt to remove him, and the case could wind up at the supreme court.
