President Donald Trump’s recent decision, to say goodbye to the governor of the Fed Lisa Cook introduces greater uncertainty in a turbulent situation for monetary policy and economy in general.
First, a few words about the speech of the president of the Federal Reserve, Jerome Powell, in the Jackson Hole symposium last week. Your comments have not changed our basic perspective: We expect a series of gradual cuts of interest rates, which will probably begin with a 25 basic points cut in September, to return the interest rate of federal funds to a neutral range (between 3.0 % and 3.5 %)probably before the end of Powell’s mandate as president of the Fed in May 2026. In his speech, Powell cited the growing downward risks for employment and the transitory nature of the effects of tariffs as reasons why the policy “might need an adjustment, the clearest signal that could give that the Fed intends to announce a cut of type of types of 25 points of 25 points. However, he also stressed that the return to neutrality, at least during the time he has as president, will probably be gradual and will depend on inflationary pressures being punctual.
Since then, Jackson Hole has been eclipsed: on Monday night, President Donald Trump announced the dismissal of the governor of the Lisa Cook Federal Reserve of his position “For justified cause.” Cook quickly responded that “there is no justified cause according to the law” and that it will not resign. This event could have consequences for the perception of the independence of the Fed, although the potential impact on the FED policy (and in interest rates) is far from being clear.
The presidential authority to dismiss the governors of the Fed
Earlier this year, the Supreme Court confirmed the special status of the Federal Reserve as a quasi -private institution, whose governors can only be dismissed by “justified cause”, a threshold that is normally reserved for serious offenses, such as fraud. That sentence contributed to relieve concerns about the erosion of the independence of the Fed, after Trump threatened to dismiss the president of the Fed, Powell, earlier this year.
Trump’s new statement reopens those issues. He cited as sufficient cause the supposed false statements of Cook on the 2021 mortgage agreements raised in a criminal complaint by Bill Abundo, director of the Federal Housing Financing Agency. However, Cook denies the accusations.
Repercussions for the staff and policy of the Fed
In our opinion, this issue goes far beyond Cook. The accusations have political connotations, given the public pressure campaign that Trump has been carrying out for interest rates to lower.
Although Cook replacement would not directly change the majority of votes of the Federal Open Market Committee (FOMC), its position is important because the majority of votes of the Board of Governors could change in matters such as the appointment of the presidents of the banks of the reserve.
Each Regional Bank of the Bank of the Reserve payroll to a president for a five -year mandate, but the final approval falls to the Board of Governors of the Fed. The Board renews the appointment of all the presidents at the end of February every five years (the years ending in “1” or “6”) in what is usually a procedure vote.
When the renovation is re -voted in February 2026, A majority of Trump’s favorable board could, at least in theory, veto or remodel the direction of regional banks for the next five years. Five presidents of regional reserve banks are also members with the right to vote of the FOMC, with one -year mandates for rotation (except the president of the Fed of New York, whose position is permanent), so that the political changes in their list could affect political decisions over time.
There are no precedents of any of thisbut some jurists also argue that a majority of four members of the Board of Governors of the Federal Reserve could dismiss the presidents of the regional banks outside the normal five -year re -election cycle, although they would have to justify the reason for the dismissal.
Unknown territory
Step back, All this is unknown territory. It is likely that cook dismissal is subject to litigation and that it has been processed in the courts for some time. If Cook does not obtain a court order against the president’s decision, the position could remain vacant while the case is processed in the courts.
Even if the courts confirm the dismissal of Cook for just cause, the confirmation by the Senate of the people who will occupy the vacant positions of governor remains uncertain, despite the republican majority.
Key Republican senators have discreetly communicated their refusal to appoint a president of the partisan Fed, and we could extrapolate this to the Fed Board in general. The renewed attention to the Fed could make it difficult for the Senate (and the Senate Banking Committee) to confirm a Fed candidate that seems too political, too partisan or too moderate. Any confirmation process can be difficult and long, which could lead to a prolonged period of vacancies at the Board of Governors of the Fed.
There is also uncertainty about what the individual governors of the Board would do (even if they are appointed by Trump and confirmed by the Senate) once they face the question of the re -election of the presidents of regional banks. According to Bloomberg from an application under the Law on Freedom of Information, the current governors of the Fed Christopher Waller and Michelle Bowman abstained voting on the appointment by 2022 of the president of the Fed of Chicago, Austen Goolsbee (which was still approved by majority), but the abstention has much less consequences than altering decades of precedents and vote to a acting bank president.
Implications for types and markets: more uncertainty and risk premium
Trump’s criticisms to those responsible for the Fed this year have focused on their refusal to lower interest rates. However, Change decades of Federal Reserve standards to lower the official type between 150 and 175 basic points, as several responsible for the Trump administration have defended, may not reduce the yields of long -term bonds.
Although market reaction to the news has been relatively moderate so far, the greatest uncertainty, The higher term premiums and the most pronounced performance curves resulting from the perception of the erosion of the independence of the Fed, regardless of what it really does, could counteract this situation. A weaker US dollar, with inflationist implications, could also be problematic for nominal yields of the longer term bonds. The equilibrium inflation rates of the treasure titles against inflation (Tips) of the US are currently valuing relatively benign perspectives, with long -term limited inflationary risks, but that could change.
We continue to think that the probability that the FOMC performs cuts of severe and rapid types is very lowgiven the institutional structures that remain in force and the necessary time to litigate what would be unprecedented measures. In fact, The numerous reasons to be calm with respect to the independence of the Fed are still valid. However, although the risks seem low, the new Trump administration strategy deserves the attention of investors.
Although each of the possible candidates for Fed may seem reasonable separately, The possibility that a block of four members is willing to exercise their right of veto on the presidents of the banks of the reserve introduces greater uncertainty in a turbulent situation for monetary policy and the economy in generalsomething that investors will have to face eventually when they consider the decisions of allocation and diversification of their portfolios ”