President Trump has made no secret of his longstanding desire for lower interest rates to juice the economy and reduce the cost of servicing the $30 trillion federal debt. But his attacks on the Federal Reserve will prove self-defeating, driving up borrowing costs for American consumers, businesses, and the federal government.
For months, the president has threatened and insulted Fed chair Jerome Powell for refusing to cut rates, even toying with the idea of firing him over supposed (and nakedly pretextual) cost overruns on the renovation of the Fed’s headquarters. Yet despite the bluster, he has stopped short of the one move advisers warned him could turn financial markets against him: actually sacking him. Why risk it when Powell’s term as chair expires in May, at which point Trump (who appointed him in 2018) will get to select a replacement more willing to do his bidding?
The president even got an unexpected chance to fill a Federal Reserve Board seat last month when Fed governor Adriana Kugler resigned under suspiciously hasty circumstances before the end of her term, allowing Trump to nominate his economic advisor Stephen Miran to succeed her. You’d think that’d be good enough to keep him placated for a while. Not so.
On Aug. 25, Trump posted a letter to Truth Social announcing he was firing Federal Reserve Board governor Lisa Cook over mortgage fraud allegations from before she joined the Fed. This unprecedented escalation – the first attempt to fire a Fed governor in presidential history – followed a politically motivated investigation started by the Federal Housing Finance Agency’s Bill Pulte, a Trump loyalist and donor who has weaponized his government position to make similar accusations against other MAGA political enemies (California Sen. Adam Schiff and New York Attorney General Letitia James).
Cook, a Biden appointee whose term is set to run until 2038, has refused to resign and is contesting the dismissal. The Supreme Court recently ruled that presidents have wide latitude to fire the heads of independent agencies, but it made a point to carve out an exception for the Fed, whose governors can only be removed “for cause.” What that means exactly, no one knows … because no president has ever tried to fire a Fed governor. Until now.
Although the Department of Justice has launched a criminal investigation into the allegations, Cook hasn’t yet been charged with a crime. It’s unclear whether an allegation of malfeasance that predates Cook’s employment at the Fed and is unrelated to her job meets the judicial bar for “cause” set by the Federal Reserve Act. The matter will be decided by the courts, which granted Cook a preliminary injunction last night, allowing her to stay in the job while the case gets litigated.
Of course, this isn't really about mortgage fraud – it's about seizing control of the Fed. Trump’s not coy about the endgame. On Aug. 26, the president bragged that “We’ll have a majority very shortly, so that’ll be great.” Trump already has two appointees on the Federal Reserve Board, Chris Waller (a favorite to succeed Powell as chair) and Michelle Bowman, and he will likely get a third soon once Miran gets confirmed. If the president ultimately succeeds in pushing out Cook, he’ll have appointed four of the board’s seven members, possibly before Powell even steps down.
That wouldn’t be enough to directly control the 12-person Federal Open Market Committee that sets rates. But a four-person Federal Reserve Board majority would have veto power over the appointment of the regional Fed presidents who sit on the FOMC – and those presidents just so happen to be up for reapproval for five-year terms at the end of February in what's normally a rubber-stamp vote, raising the stakes of both the outcome and the timing of the Cook ruling. Not that the administration needs to actually fire every independent-minded dissenter to chill dissent: sometimes, the demonstration effect of seeing some of your colleagues’ lives ruined is enough to sway behavior.
Yet even if Trump succeeds in stacking the FOMC with loyalists (a big if), the president will still struggle to get what he wants most out of this whole enterprise: substantially lower borrowing costs.
The crux of the issue is that the Fed only has direct control over short-term interest rates, but most borrowers care about long-term rates, which are determined by market expectations of future economic growth, inflation, and fiscal policy. The more the president leans on the Fed, the greater the compensation demanded to hold long-term bonds, as investors lose confidence in the Fed’s ability to keep inflation under control no matter the political costs to the president.
Accordingly, the benefits to Trump of pushing for lower interest rates than merited by economic conditions would likely be offset by large and sustained increases in long-term yields. In the worst-case scenario, Trump forces the Fed to set rates inappropriately low, causing inflation to rise and damaging the Fed’s credibility. By the time the president starts feeling the political pain of runaway prices and orders the Fed to reverse course, the genie is already out of the bottle: inflation expectations are unanchored, long-term rates have spiked, and the Fed is forced to print ever more money to pay for the mounting costs of servicing a growing debt pile. This may sound like the story of an emerging market, but it’s becoming suddenly plausible for the United States.
The last time a US president messed with the Fed’s independence was when Richard Nixon strong-armed Fed chair Arthur Burns into keeping rates low ahead of the 1972 presidential election, causing inflation to spike. It took a decade and punishingly high interest rates to get runaway inflation under control and rebuild the Fed’s credibility, long since understood to be a key pillar of America’s world-beating economy and the dollar’s reserve currency status. Most Wall Street leaders understand the risks of going down the same path again, even if they are too timid to speak out publicly against it (with few exceptions).
So why the muted market reaction? Maybe investors doubt Trump can pull this off. After all, we've been down this road with President Trump before – he's been threatening the Fed since 2017 to little effect. Or maybe investors assume he'll back down in the face of any significant bond market fallout – the so-called TACO trade. But what if that market calm emboldens him to push harder? By the time investors wake up, the damage may be done. As Hemingway wrote about bankruptcy, crises happen gradually, then suddenly.
The real irony? Trump is ramping up his Fed attacks just as he's about to start getting the rate cuts he wants – though not for reasons he'll like. Two weak jobs reports show his tariffs, immigration crackdown, and policy volatility are beginning to weigh on the labor market. The Fed will almost certainly cut rates next week, even if not as aggressively as Trump demands given signs of rising inflation.
If Trump truly wants to lower borrowing costs for Americans, he should stop attacking the Fed and start cutting the deficit. Otherwise, the president will head into the midterms with a slowing economy, soaring prices, and higher long-term rates. Turns out not even the world’s most powerful man can bully bond markets into submission.