We're back to playing dangerous games with the Fed. This morning, the head of the Federal Housing Finance Agency accused Fed Governor Lisa Cook of committing fraud. The president immediately called for Governor Cook to step down, and it’s being reported that Trump is considering firing her if she doesn’t. This is his most blatant and dangerous attack yet on the Federal Reserve System. Even if Governor Cook broke the law, and there’s no indication that she did, this move is dangerous and irresponsible, and a tactical mistake for a president hoping to appoint more governors to the Fed. Theories abound as to why he’s doing this, but first and foremost, this should be seen for what it is: a blatant shakedown and an attempt to strong-arm policymakers into lowering rates in September. It won’t work. And it will cause lasting economic and societal damage. That’s concerning. But remember, the Fed was built for this exact situation. Under the guidance of Chair Powell, it remains Fed tough.
Earlier this month, former Fed Governor Adriana Krugler stepped down unexpectedly, giving the administration an early nomination to the Board (her term was up in early 2026). As we outlined in our last FOMC Download, Governor Kugler's resignation will do nothing to quench the administration's thirst to undermine the central bank's independence. In fact, it likely made them even more thirsty. We’ve long held the belief that this administration operates under schoolyard rules. In that world, you give up your lunch money, and they come back for your backpack. As Powell has made abundantly clear for months, he and the FOMC aren’t interested in giving up their lunch money.
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This is not a tactically sound strategy for Trump. We don't know the validity of the charges brought against Governor Cook, but there is a decent chance they are politically motivated, which is another hallmark of the current administration. We are confident that the Board and Governor Cook will do the right thing if laws have been broken. We are also confident that she and the Board will do the right thing if they have not been. Either way, it’s impossible to view this as anything other than an attack against an institution that has bucked and enraged the Trump administration. That’s a problem for both the Fed and the President. It’s clear why these constant political attacks against the Fed are bad for its credibility; we won’t rehash that here. But they are also tactically unsound if the president wants to maximize his Fed influence. Each nakedly political attack creates an incentive for the FOMC to exhibit its independence. Will policymakers vote to keep rates elevated solely to show the world that they are still independent? No. Policy will be driven by the economics and forecasts. But they’re also people. Will a fence-sitting member(s) of the FOMC be pushed to hold firm because they don’t like the optics of central bankers being pushed around by politicians? Maybe. And it would be a sound economic move. The independence of a central bank is foundational. Lose that, and the game is over. That’s why restraint and patience would be a better strategy if the president wanted to maximize his Fed influence.
Trump is all but guaranteeing that Powell stays on as a Governor. Powell’s term as FOMC Chair ends next May, but, crucially, his term as a governor on the Board of Governors doesn’t end until January 2028. Traditionally, when a governor is not renominated to be Chair, they resign their governorship and open up a position for presidential appointment. The Fed is an institution steeped, and I mean absolutely steeped, in tradition. It takes a historic shock to change the central bank’s DNA. I say that as someone who has worked at high levels of the organization. And so, I don’t say this lightly, but there is very little chance that Powell resigns his governorship next year when his term as Chair expires. The institution is facing an existential threat aimed at undermining over a hundred years of policy. We know this. Powell knows this. Children in preschool know this. What is less obvious is the quiet resolve with which Jerome Powell carries himself. That is not an endorsement of his time as Fed Chair. It is a fact. While seemingly mild-mannered, Powell is not one to be pushed around. And he will not let the institution crumble if he can help it. That means Trump’s overt and relentless attacks against the Fed are going to push him to buck tradition and stay on as long as he can. There’s little question that Powell would have stepped down next year had Trump remained patient and quiet. Instead, he scored an own goal that will further frustrate a president who is unaccustomed to not getting his way.
No, this doesn’t put the regional presidents at material risk. Reports are circulating that the administration is targeting Board governors to get at the more insulated regional Fed presidents. As a quick recap, the FOMC consists of 19 members, seven Governors in DC, and 12 regional bank presidents. Of those 19, 12 vote on policy with the seven governors in DC and the New York Fed President (John Williams) voting every year. The remaining four voting slots rotate annually between the other 11 regional presidents. Presidents nominate Board Governors, but they have no direct authority over regional presidents who are chosen by regional bank Boards comprised of banks and businesses in each district. Here’s the rub. If a president has enough influence with DC Board members, they could theoretically influence the selection of both the regional Boards and the regional Presidents. How? The Board in DC has to approve both regional board members and regional Fed presidents. Historically, those have been rubber stamps. There’s another wrinkle. Regional president terms expire every February in years that end in one and six. That means that if Trump packed the Board with loyalists, they could potentially upend tradition and deny the “automatic” reappointments. To do that, he would need to have four Governors willing to completely undermine the credibility of the institution. If Cook steps down, you could credibly argue that there are two. The administration has proven, many times over, that it puts a premium on loyalty. It’s fair to say that any nominee from the second Trump administration would be willing to flip the table and cause chaos if the President wanted it. But they’d need two more to actually get it done. Some news outlets have lumped in Governors Waller and Bowman, two Trump appointees from the first term, with Miran and another potential Trump pick. But that is unfair and unfounded. Waller and Bowman have shown no signs of wanting to upend the order. They may both be gunning for Powell’s chairmanship, but there is no evidence they’d be willing to end fed independence to get the job. Until they show clear signs that they’re willing to go against their previous actions, it should be assumed that they are not loyalists in the same way that Miran is likely to be. In other words, the regional Fed presidents are safe for now. And monetary policy can continue to be driven by economics and forecasts.
It’s undeniable that the Trump Administration has damaged the Fed. But, we’re not yet at a place where we should be assuming that we’re a nomination away from undoing modern economics.
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