Trump's Attempt to Fire Fed's Cook: A Power Struggle and Central Bank Independence

According to Wall Street economists and analysts, former U.S. President Donald Trump's unprecedented attempt to fire Lisa Cook, a member of the Federal Reserve Board of Governors, is likely to end up being decided by the U.S. Supreme Court (SCOTUS). Trump announced on Monday local time his intention to fire Cook "for cause," citing allegations of false statements in mortgage applications. A report from Evercore ISI on Tuesday noted that this is the first time since the Federal Reserve was founded in 1913 that a president has tried to fire a governor. "While we think the outcome may be uncertain, we guess the Supreme Court would uphold this action," Tobin Marcus, head of U.S. policy and politics at Wolfe Research, told clients on Tuesday. He added: "The legal protections for the Fed chair and non-chair governors are identical, so Supreme Court approval of this action would significantly undermine Fed independence, and even the attempt to fire Cook itself raises obvious concerns."

"For Cause": A Key Point of Contention

Cook has stated that she will not resign, asserting that Trump does not have sufficient legal grounds to remove her. Abbe Lowell, Cook's lawyer, said on Tuesday that they "will file a lawsuit to challenge this illegal action." Ed Mills, Washington policy analyst at Raymond James, told clients on Monday that the case is likely to reach the Supreme Court after passing through various levels of the judicial system. Mills pointed out that the Federal Reserve Act grants the president the power to remove governors "for cause," but the specific definition of this term is unclear in the law. Michael Feroli, chief U.S. economist at JPMorgan, stated on Monday that "the alleged mortgage fraud occurred before Cook became a governor, and 'for cause' protection is generally seen as limited to reasons that occur during her term." However, he also noted that there are not many precedents for removal "for cause." Marcus said that in the short term, Cook will seek an injunction against Trump's actions, and the U.S. District Court for the District of Columbia is likely to grant this request. This would maintain the status quo at the Fed until the Supreme Court makes a ruling.

Trump's Control of the Federal Reserve

Jaret Seiberg, policy analyst at TD Cowen, said on Tuesday that if Trump succeeds in forcing Cook to leave her position before the end of the year, he will gradually gain a majority on the Board of Governors before the Fed's vote in January to elect regional Fed presidents. Cook's successor nominated by Trump would form a new lineup with Fed Vice Chair Michelle Bowman, Governor Chris Waller - and Stephen Miran, the expected nominee to fill the vacancy after Adriana Kugler's resignation this month. "The president's people may be able to object to the candidates of regional Fed presidents, and instead support candidates who support low interest rates," Seiberg said. He added: "This will face obstacles, but once successful, Trump will have a greater influence on the Federal Open Market Committee (FOMC) and on interest rate policy."

Market Reactions and Historical Lessons

Despite the actions taken by Trump based on what he considered "for cause," prediction markets are skeptical about Trump's ability to influence the course of the Fed this year. On the Polymarket platform, the probability of Powell being removed from the position of Fed chair in 2025 is only 10%, indicating that investors believe it is difficult for Trump to break through the independence of the central bank before Powell's term ends in May 2026. Trump's moves to fire Cook present a different picture. The market's pricing probability of Cook being fired before December 31 is 27%, indicating some legal or political risk, but it is still widely expected that she will overcome the challenge. History shows that previous presidents have also put pressure on the Fed. The Cato Institute pointed out in a report in October 2024 that this intervention is more common than people think. In 1951, Harry Truman forced President Thomas McCabe to resign to ensure the financing of war debts, and during Lyndon Johnson's time, William McChesney Martin was reprimanded at a Texas ranch for raising interest rates during the Vietnam War, and in the early 1970s, Richard Nixon pressured Arthur Burns, which economists later linked to runaway inflation. Thomas F. Cargill and Gerald P. O'Driscoll Jr. argue in a 2013 Cato study that the independence of the Fed is more of a myth than a reality, pointing out that both parties intervene when political need arises. If Trump fires Powell, it is sure to cause controversy, but the market may welcome it if it is seen as a prelude to an easing monetary policy. A Fed that is more aligned with the White House may cut interest rates faster and weaken the dollar. The market's reaction to Trump's actions against Cook remains relatively calm, suggesting that investors still widely believe that this action is just a bluff.