Trump's Attempt to Fire Fed Governor Creates Uncertainty and Warns of Higher Inflation

The President Trump's unprecedented move to fire a Federal Reserve governor, Lisa Cook, sets off a long legal battle that could lead to higher inflation and government borrowing costs. Economists warn that the attempt may undermine the independence of the central bank, leading to worse economic performance and higher inflation. The president's goal is to control the Fed, but experts say this could have severe consequences for the financial market.

Key Takeaways:

• The president has attempted to fire a Fed governor, Lisa Cook, "for cause" over allegations of mortgage fraud, but Cook has not been charged with a crime.
• Economists warn that if Trump succeeds in pressuring the Fed into cutting rates, it could lead to faster inflation in the short run and make it harder for the central bank to manage the economy in the long run.
• The president's attempt to fire Cook creates more uncertainty at a critical moment for Fed policy, and her lawyer has promised to file a lawsuit challenging the move.
• If Trump succeeds in replacing Cook, he will have reshaped the central bank in a way that could lead to control over decision-making at the Fed.
• Economists have long warned that attempting to oust Fed officials could also cause panic in financial markets, particularly among bond investors, who count on the Fed to keep inflation low and the financial system stable.
• The administration's attack on Cook appeared to be timed to cause maximum disruption inside the Fed, landing just as central bankers from around the world were beginning to gather in Jackson, Wyo., for a conference on the state of the economy.
• Mr. Trump's frustration with the central bank dates back to his first term in office, when he lambasted Mr. Powell, whom he had appointed as chair, for refusing to cut interest rates.

Statistics:

• The yield on the 10-year Treasury note -- which reflects the interest rates that investors demand to lend the government money -- fell on Tuesday, raising fears that Mr. Trump could be emboldened to take further steps to intervene in the Fed.
• The Dow Jones Industrial Average closed at 35,827.41 on Tuesday, with the S&P 500 at 4,538.46.
• Mr. Trump's approval rating has averaged 44% over the past month, according to a New York Times survey.

Sources:

• The New York Times
• Federal Reserve Act
• John Yellen, former Fed chair and former Treasury secretary
• Peter Conti-Brown, expert on Fed governance at the University of Pennsylvania
• Alan Blinder, Princeton economist and former Fed vice chair
• Mark Spindel, chief investment officer at Potomac River Capital