BREAKINGVIEWS-The fight for the Fed reaches its decisive moment

By Gabriel Rubin

WASHINGTON, Aug 26 (Reuters Breakingviews) - Is the Federal Reserve independent? The institution and even its leader, Chair Jerome Powell, remain steadfast for now. The definitive answer, though, depends on whether President Donald Trump is successful in firing Governor Lisa Cook over unproven mortgage fraud allegations. If he prevails in an inevitable court fight, he will have carte blanche to reshape the central bank, just as he has done at less-insulated federal agencies. The credibility of U.S. economic governance hinges on this moment.

Announced on Monday night, Cook — one of the Fed’s seven policy-setting board members — immediately rejected the purported firing. Her lawyer Abbe Lowell, who has also represented Trump-world figures like Ivanka Trump and Jared Kushner, claimed a lack of process or legal authority. Indeed, the Supreme Court earlier this year noted that the Fed is a unique institution, whose members can only be removed for clear cause. Vague, unofficial accusations of mortgage fraud seem to fall short of that hurdle, though judges will ultimately decide.

What does seem clearer is the ultimate purpose of this broadside. Trump and various administration officials, especially Federal Housing Finance Agency Director Bill Pulte and economic advisers like Kevin Hassett, are applying furious pressure for lower interest rates. If Cook can be removed, there is little protection for other members of the Fed board who disagree with the president. This is especially true if recent nominee and Trump advisor Stephen Miran, who takes a dim view of central bank independence, is waved through by Congress.

The dollar’s slide against other major currencies on Tuesday shows growing market unease with this wrecking-ball approach. While a pliant Fed might be able to slash short-term interest rates, markets still hold sway over long-term ones, which rose on the news. After all, placing dovish loyalists on the board should increase inflation expectations, implying rates will have to rise in the future.

What’s remarkable, though, is that both moves are relatively small: The euro rose 0.37% against the dollar, while the spread between 2-year and 30-year Treasury yields reached its widest point since 2022. Such jitters belie the scope of Trump’s actions, but they do at least indicate that investors are aware of the risk he’s running. For now, they can only brace for a court ruling that will determine the future of independent U.S. monetary policy.

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CONTEXT NEWS

U.S. President Donald Trump said he was firing Federal Reserve Governor Lisa Cook over unsubstantiated allegations of mortgage fraud.

Cook’s lawyer, Abbe Lowell, said Trump’s “demands lack any proper process, basis or legal authority. We will take whatever actions are needed to prevent his attempted illegal action.”