Trump's Pressure on the Fed Raises Independence Concerns

For months, US President Donald Trump and his close aides have been attacking Federal Reserve Chairman Jerome Powell, accusing him of failing to cut interest rates as quickly as they would like. They claimed he was either incompetent or politically motivated, or both.

Nick Timiraos, a Wall Street Journal reporter known as the "New Fed Wire Service," wrote that these attacks are part of a broader pressure campaign by Trump and his allies to make things difficult for Fed officials, first Powell, and now Cook, to force them to compromise or resign, thereby getting lower interest rates for Trump, or making room to plant loyalists.

Tim Mahedy, a former senior advisor at the San Francisco Federal Reserve, who now runs an economic consulting firm in San Diego, said: "The truth of the matter should be seen this way: this is naked blackmail, a means of coercing policymakers to cut interest rates."

Trump's Attack on the Fed 'Goes Up a Notch'

The attack on Cook became even worse on Friday night. Trump's social media account posted an image containing Federal Reserve Board members and a portrait of Stephen Miran, who Trump nominated to fill the vacant seat on the Board. In the center of the picture, there is an enlarged photo of Cook with a red "X" marked on it, and she is described as a "liar". In a post on Saturday, there was also a photo purportedly of Cook's home in Michigan.

Cook has reported that she will not be "forced" to resign because of "questions raised in a tweet". She said she would provide more information about the mortgage transactions questioned by Trump administration officials. But she declined to comment further at the Jackson Hole conference.

The White House has not explained why the accusations were directed at Cook. If they try to remove her, it could delay the case in court for months. Federal Reserve Board members can be dismissed for "just cause", but it is currently unclear what constitutes this cause.

The allegations made by the Trump administration put Cook in a delicate position. "I think Director Cook has a responsibility to explain what happened," said Michael Strain, an economist at the American Enterprise Institute. "There are many things we don't know yet."

The attempt to remove Cook comes less than two weeks after Trump nominated his economic advisor Miran to the board. The seat became vacant due to the sudden resignation of Adriana Kugler on August 8. She did not state the reason for her resignation.

These threats are forcing Fed officials to carefully balance defending the institution and avoiding direct political confrontation. During the Jackson Hole seminar, the increased presence of security forces outside the wooden lodge below the Grand Teton Mountains was a clear reminder that this once quiet academic seminar had now become a high-security event.

At Jackson Hole, officials' answers to questions about independence were extremely diplomatic. Susan Collins, president of the Boston Federal Reserve, said in response to the president's comments about Cook: "At the end of the day, I have to look in the mirror every day, and I have to do what I know is right."

Kansas City Federal Reserve President Jeffrey Schmid told CNBC when asked about the independence of the Federal Reserve: "Real steel must be tested by fire."

Mahedy said the Cook case shows that Miran's nomination did not meet the White House's strong desire to control the Federal Reserve. He said the Trump administration's rules of engagement are like "schoolyard bullying", that is, "after handing over lunch money, they will come and ask for your backpack."

The Situation May Get Worse After Powell's Term Expires

The White House stated that its goal is to accelerate economic growth, and monetary policy should align with the president's agenda. Government officials said the Federal Reserve is too concerned about the inflationary risks of tariffs and should cut interest rates to stimulate home sales. Currently, some policymakers at the Federal Reserve are uneasy about taking stimulus measures at a time when companies are still considering whether they can raise prices to offset tariff pressures.

In his highly anticipated Jackson Hole speech last Friday, Powell hinted that officials are prepared to cut interest rates at their next meeting due to changes in the economic outlook. Powell consistently emphasizes that Federal Reserve decisions are based entirely on economic judgments, but alignment with Trump's wishes could harm the perception of Federal Reserve independence.

However, former Federal Reserve officials said they are not concerned about the intense pressure on Powell, because those who know Powell believe these things will not work. But they are more concerned that after Powell's term as chairman expires next May, Trump and his newly appointed chairman may systematically dismantle the operating rhythms and norms of the institution that has long strived to move away from partisan politics.

"We have seen what has happened to staff at the Department of Justice and the FBI," said Jon Faust, a former advisor to Powell. "The next chairman may try to launch a similar cleansing campaign on the staff of the Board."

Trump currently has two nominees on the seven-member Federal Reserve Board. If he nominates two more, including appointing a new chairman next spring, his allies may have a majority, leading to a radical transformation of the entire Federal Reserve system.

One way to weaken the Federal Reserve's structure is to undermine the status of its 12 regional Federal Reserve banks.

Although seven of the Federal Reserve governors are nominated by the President and confirmed by the Senate, the presidents of the 12 regional Federal Reserve banks are selected by local boards of directors made up of bankers and business leaders in their regions. Both types of members participate in interest rate policy voting, but the governors reside in Washington, while the presidents of the regional Federal Reserve banks are permanently based in New York, Chicago, San Francisco and other places.

The term of a regional Federal Reserve bank president is five years, and they all expire at the same time. The governors must approve the reappointment of the 12 presidents by next March.

If Trump has a majority on the board at that time, they may refuse to reappoint the presidents of the regional Federal Reserve banks. Dismissing regional Federal Reserve bank presidents who are performing their duties conscientiously would break decades of precedent and breach the key firewall that has protected the independence of the Federal Reserve since its establishment in 1913.

At the end of 2022, in the vote to approve Austan Goolsbee's appointment as president of the Chicago Federal Reserve Bank, the two board members appointed by Trump, Waller and Bowman, abstained. Goolsbee took office in January 2023.

Federal Reserve officials still remember the lessons of the 1970s when political pressure led to a series of policy mistakes. The high inflation that followed could only be corrected by extremely high interest rates and a painful recession in the early 1980s.

Historically, financial markets tend to grant lower borrowing costs and more stable currency value due to central bank independence, but if investors lose confidence in the Federal Reserve's ability to make decisions based on economic data rather than political pressure, these benefits may quickly disappear.