Trump faced a caution from a world leader about the independence of the Federal Reserve.
In a move that could potentially reshape the Federal Reserve's monetary policy, President Trump has requested Judge Aileen Cannon to allow the immediate removal of Federal Reserve Governor Lisa Cook. This request comes after Trump ally and Federal Housing Finance Agency Director Bill Pulte filed criminal referrals alleging Cook committed mortgage fraud before joining the Fed.
The independence of the Federal Reserve from political influence in its monetary policy decisions has been credited as being a pivotal safeguard for the U.S. economy and its role in the global economy. However, if Trump is able to successfully remove Cook, it would allow him to appoint a replacement who could favor his stance on cutting interest rates.
The market is pricing in a 25-basis-point cut to the Fed's benchmark federal funds rate at the September meeting, with an 89.7% probability of a cut versus a 10.3% chance of rates staying at their current target range. This sentiment is echoed by Fed Chair Jerome Powell, who signaled that the changing balance of risks to the Fed's dual mandate could open the door to a rate cut.
The upcoming August CPI print and August jobs report will help inform Fed policymakers ahead of their next meeting and interest rate decision on September 17. Recent data, such as July's CPI data showing headline inflation at 2.7% and core CPI at 3.1%, and a weak July jobs report raising concerns about a deterioration in the labor market, will likely play a significant role in their decision-making process.
European Central Bank President Christine Lagarde has warned that undue interference in the Federal Reserve's operations by President Trump could pose a serious economic risk to the U.S. and the rest of the world. Economic research has found that political interference in central banks around the world has contributed to higher inflation, weaker currencies, and reduced stock prices.
If the courts agree to the removal of Cook "for cause," this would mark the first time in U.S. history that a sitting Fed governor has been removed. The novelty of the situation could result in the case reaching the Supreme Court, with potential far-reaching implications for the independence of the Federal Reserve and the stability of the U.S. economy.
Meanwhile, President Donald Trump's tariffs have caused uncertainty over the extent to which they will lead to persistent inflationary pressures. The impact of these tariffs, along with the potential removal of Cook and the subsequent appointment of a new Fed governor, will be closely watched by economists and market participants in the coming months.
