In an unexpected twist to this situation, former President Donald Trump attempted to fire Federal Reserve Governor Lisa Cook last week. This innovative step was a consequential one in the world of the central bank. However, in spite of this, Cook will not be relieved from her duties thanks to a recent court ruling that protects her position. The Justice Department is reportedly now investigating allegations of mortgage fraud against her. This federal investigation only further complicates her stewardship of the department.
This incident, although serious, is especially remarkable because Cook is the first Fed governor to be subject to an attempt at dismissal. Our economy is still reeling from the impacts of high, unstable inflation and the deteriorating job market. Financial analysts and policymakers alike are keeping a close eye on what Cook’s fate could mean for the future. On September 15, Stephen Miran, one of Trump’s economic advisors, was cleared to take his seat on the Fed’s Board of Governors. This appointment is a harbinger of continued political engagement with the central bank.
The Strained Relationship Between Trump and the Fed
As we detailed last fall, Trump has been particularly vocal in harassing the Fed and its Chairman, Jerome Powell. Similarly, Mr. Lachman vehemently disagrees with the central bank’s reluctance to lower interest rates. He has repeatedly urged the Fed to take aggressive measures to stimulate the economy, especially as signs of a slowing labor market have become evident.
This summer, job growth has slowed to a trickle, rekindling speculation about how soon the Federal Reserve might begin cutting interest rates. The Fed today probably will announce its first interest rate cut since December. While contributing to a potential recession, this decision will do very little to stabilize the fragile labor market. According to Fed Chair Jerome Powell, “downside risks to employment are rising,” emphasizing the urgency of addressing these economic challenges.
With inflationary pressures increasing, the Consumer Price Index increased 2.9% in August from a year before. Economic analysts are starting to draw a connection between this increase in inflation and Trump’s economic policy, specifically with his introduction of tariffs. Just as inflation fears start to take hold, so have the Fed’s top brass shifted their expectations.
Cook’s Controversial Tenure and Political Fallout
Lisa Cook’s position as a Fed governor has become increasingly precarious following Trump’s firing attempt. For the time being, she is still in her post. Yet her long-term prospects at the Federal Reserve are certainly clouded by the continuing investigation into the allegations of mortgage fraud. Legal experts say the result of this investigation could be historic. It could decide if she is able to continue to hold onto her position without further political embarrassment.
Cook’s confirmation would be a historic first for the Federal Reserve. For the first time ever, a sitting governor is met with an epic, never-before-seen attempt at removal. Her continued time in office underscores the delicate line between politics and monetary policy. Yet this important working relationship has come under tremendous strain in recent years.
“Inflation has increased since the first quarter, but these numbers include the effects of import tariff increases, which, with inflation expectations anchored, I continue to expect will only temporarily raise inflation.” – Fed Governor Christopher Waller
Waller’s statement gives us a glimpse of something that some Fed officials deep down believe. They believe that the latest inflationary pressures will prove to be more transitory than first expected. San Francisco Fed President Mary Daly echoed this sentiment, stating that “tariff-related price increases will be a one-off.” These points of view indicate that, though inflation is an apparent threat, it doesn’t have to govern long-term policy choices.
The Economic Landscape Ahead
In stark contrast to the last several years, several economic indicators imply that businesses will have a more difficult time passing on price increases. St. Louis Fed President Alberto Musalem noted that the current economic climate presents challenges for companies aiming to increase prices. This sentiment dovetails with the prevailing view — not just here, but across the committee — that any forthcoming pick-up in inflation will be transitory.
Miran’s confirmation to the Fed is timely indeed as policymakers grapple with each of these challenging economic realities. His term is up at the end of January. So, his influence has the potential to shape major monetary policy decisions ahead.