Trump's Dismissal of Fed Governor Lisa Cook Raises Alarms Over Fed Independence, Roiling Markets

TradingKey - On Monday, August 25, President Donald Trump announced on Truth Social the immediate dismissal of Fed Governor Lisa Cook. Cook countered this claim on Monday evening, stating that Trump lacks the authority to remove her and that she will not resign.

Analysts remain uncertain whether Cook must vacate her position at the Federal Reserve Board immediately. Should the dismissal proceed, Trump would make history by firing a sitting Fed governor, thus advancing his goal of exerting influence over the central bank.

Recently, Nick Timiraos, often referred to as the "New Fed whisperer," noted that Trump has appointed 2 members to the Federal Reserve's seven-member board and could potentially secure a majority if he fills two more seats, paving the way for a potential overhaul of the Fed's structure.

Currently, two board members were appointed by Trump during his first term. Following the recent resignation of Governor Adriana Kugler, Trump has nominated his economic adviser Stephen Miran as an interim replacement. Timiraos suggests that if Trump achieves a majority on the Fed Board by next March, he could wield control over the Federal Open Market Committee (FOMC) by instructing the board to block the reappointment of regional Fed presidents.

According to protocol, the seven Fed governors are nominated by the President and confirmed by the Senate, while the 12 regional Fed bank presidents are selected by local boards consisting of bankers and business leaders from their respective areas. Although the White House does not have a say in these appointments, the Fed Board has veto power over their nominations or reappointments.

Under the Federal Reserve Act, the terms for all Fed bank presidents are five years, expiring at the end of February in years ending in 1 or 6. This means that by next March, the 12 bank presidents would need to be reappointed by the board. Should a board majority desire, they could potentially dismiss part or all of the regional presidents by the end of February next year.

Timiraos believes this would disrupt long-established norms and breach a key safeguard of Fed independence since its founding in 1913.

Wall Street in a Frenzy Again

Trump's dismissal of Cook has heightened concerns over Federal Reserve independence, resulting in significant market reactions. The US Dollar Index fell by 0.3% in short order, and futures on the three major US stock indices reversed previous gains and turned negative.

Mizuho Securities' Chief Strategist Shoki Omori commented that a loss of confidence in the Federal Reserve could weaken the dollar. Bart Wakabayashi, manager at State Street Bank in Tokyo, remarked that beyond the firing of a Fed governor, these actions, including tariff policies, contribute to the perception of the US as unreliable.

Moreover, OCBC Bank's FX strategist Christopher Wong suggested that Trump's actions might lead to more dovish members on the FOMC, "raising the prospects of rate cuts and a weaker dollar." With this expectation, demand for traditional safe-haven assets like gold and yen, as well as bitcoin, is increasing, and short-term US Treasury prices have risen.

During Tuesday's Asian early trading session, gold surged to a two-week high of $3,386 per ounce; the yield on two-year US Treasuries dropped to 3.69%, while five-year yields fell to 3.757%. Bond yields move inversely to prices, indicating a rise in prices.

Despite swift market responses, analysts warn that the potential risks of the "dismissal" episode are not fully absorbed, indicating high uncertainty ahead. From a long-term perspective, TradingKey analysts believe that if the Fed's independence is ultimately compromised, granting the President the power to manipulate monetary policy to stimulate the economy could lead to high inflation. This scenario could, in turn, hamper economic growth and potentially cause a long-term decline across stocks, bonds, and currency markets.