Trump Calls for Fed's Cook to Resign

Donald Trump has called for Federal Reserve Governor Lisa Cook to resign immediately, writing on Truth Social, "Cook must resign, immediately!!!!". This unprecedented attack is part of the Trump administration's broader campaign to seize control of US monetary policy and undermine the independence of the nation's most important financial institution.

Allegations of Fraud as a Pretext

Trump's demand stems from allegations made by Bill Pulte, director of the Federal Housing Finance Agency (FHFA) and a close ally of the president. Pulte accuses Cook of falsifying bank documents to secure more favorable loan terms, claiming she declared two different properties as her primary residence within a two-week span, which could constitute mortgage fraud.

However, Pulte's own statements reveal the true objective: "The party at the Fed is over," and that Chairman Powell can do as he pleases, but "either way the party is over." This suggests that a potential resignation from Cook would bring Trump closer to gaining a majority on the Federal Open Market Committee (FOMC). It's also worth noting that Cook is currently considered a moderate hawk.

Will Trump Secure a Voting Majority?

Waller and Bowman recently voted for a rate cut. On the other hand, Jefferson, who is one of the names being considered for the head of the Fed, holds very similar views. Miran, a new member of the FOMC, is expected to vote for a rate cut, replacing the hawkish Kugler. Goolsbee, a difficult Fed member to decipher, could also potentially vote for cuts. Some consider him a hawk, while others see him as a dove. He recently indicated that he sees room for rate cuts in the fall, but recent inflation increases have complicated the matter. Nevertheless, if changes were to occur and all the other individuals mentioned voted for a cut, there is a possibility of gaining a degree of control over the Fed. It is also important to remember that the head of the Fed is appointed by Trump. Source: Bloomberg Economics

A Systematic War on the Fed

Trump has waged a multi-front campaign against the Fed since the beginning of his second term. The president regularly attacks Chairman Jerome Powell, calling him "terrible," "stupid," "a stubborn mule," and "a complete idiot."

Simultaneously, Trump demands drastic interest rate cuts of 3 percentage points—from the current 4.5% to approximately 1.5%. Such a radical change could trigger an inflationary spiral and economic destabilization. In August, the president even called on the Fed's Board of Governors to "take control" from Powell if he doesn't yield to pressure.

Immediate Market Consequences

The market remains vulnerable to all of Trump's statements. If he starts attacking Powell and the Fed again, the dollar could react nervously. It was previously suggested that the dollar could even be abandoned as a reserve currency if the interest rate situation isn't more certain.

What if Trump goes one step too far? Deutsche Bank analysts warn that a potential firing of Powell could cause a 3-4% drop in the dollar within 24 hours and a collapse of the US bond market. Yields on 10-year bonds could rise above 5.5%, which would dramatically increase the cost of servicing public debt from the current $1.4 trillion to a potential $2 trillion.

Lessons from History and the World

Historical studies show that political pressure on the Fed leads to inflation with no positive effect on economic growth. An analysis by the University of Maryland found that political pressure similar to that during the Nixon administration could raise prices by 7% over a decade.

The example of contemporary Turkey under Erdogan illustrates the catastrophic consequences of political control over a central bank. Inflation in Turkey reached 75% in May 2024, accompanied by a currency collapse and a loss of credibility in international markets. As Guha from Evercore ISI warns, "The sudden materialization of a threat to Fed independence will increase market stress and shift it towards stagflation." On the other hand, comparing the monetary situation in the US to Turkey seems far-fetched, but a dollar catastrophe cannot be ruled out in the worst-case scenario.

Powell Gets Support in Jackson Hole

At the Jackson Hole conference, central bankers from around the world are preparing to defend Jerome Powell and the principle of Fed independence. This shows how seriously global institutions view the threat from Trump. Christine Lagarde, head of the European Central Bank, warns that "the independence of central banks is under increasing pressure."

Experts are raising alarms that undermining the Fed's independence could threaten the dollar's status as the world's primary reserve currency. Francesco Pesole from ING notes that "an independent Fed is a fundamental pillar of the dollar's attractiveness as a reserve currency." Jamie Dimon, CEO of JPMorgan Chase, calls the Fed's independence "sacred" and warns of the irreversible consequences of undermining it.

The EUR/USD is recovering slightly towards 1.1700 today, although the changes are not very significant. As market risk increases, US bond prices rise. Although today is calm, an intensification of interference with the Fed could lead to another wave of dollar weakness, as seen in recent months. Source: xStation5