central bank

The Trump administration renewed its request Sunday for a federal appeals court to let him fire Lisa Cook from the Federal Reserve’s Board of Governors, a move the president is seeking ahead of the central bank’s vote on interest rates.

The administration filed a response just ahead of a 3 p.m. Eastern deadline Sunday to the U.S. Court of Appeals for the District of Columbia, arguing that Cook’s legal arguments for why she should stay on the job were meritless. Lawyers for Cook argued in a Saturday filing that the administration has not shown sufficient cause to fire her, and emphasized the risks to the economy and country if a president were allowed to fire a Fed governor without proper cause.

Sunday’s filing is the latest step in an unprecedented effort by the White House to shape the historically independent Fed. President Trump’s move to oust Cook marks the first time in the central bank’s 112-year history that a president has tried to fire a governor.

“The public and the executive share an interest in ensuring the integrity of the Federal Reserve,” Trump administration lawyers argued in Sunday’s filing. “And that requires respecting the president’s statutory authority to remove governors ‘for cause’ when such cause arises.”

Bill Pulte, a Trump appointee to the agency that regulates mortgage giants Fannie Mae and Freddie Mac, has accused Cook of signing separate documents in which she allegedly said that both her Atlanta property and a home in Ann Arbor, Mich., also purchased in June 2021, were “primary residences.” Pulte submitted a criminal referral to the Justice Department, which has opened an investigation.

Trump relied on those allegations to fire Cook “for cause.”

Cook, the first Black woman to serve as a Fed governor, referred to the condominium as a “vacation home” in a loan estimate, a characterization that could undermine claims by the Trump administration that she committed mortgage fraud. Documents obtained by the Associated Press also showed that on a second form submitted by Cook to gain a security clearance, she described the property as a “second home.”

Cook sued the Trump administration to block her firing, and a federal judge ruled Tuesday that the removal was illegal and reinstated her to the Fed’s board.

The administration appealed and asked for an emergency ruling just before the Fed is set to meet this week and decide whether to reduce its key interest rate. Most economists expect they will cut the rate by a quarter point.

Suderman writes for the Associated Press.

WASHINGTON — President Trump’s attempt to fire a member of the Federal Reserve’s governing board has raised alarms among economists and legal experts who see it as the biggest threat to the central bank’s independence in decades.

The consequences could affect most Americans’ everyday lives: Economists worry that if Trump gets what he wants — a loyal Fed that sharply cuts short-term interest rates — the result would likely be higher inflation and, over time, higher borrowing costs for things like mortgages, car loans and business loans.

Trump on Monday sought to fire Lisa Cook, the first Black woman appointed to the Fed’s seven-member Board of Governors. It was the first time in the Fed’s 112-year history that a president has tried to fire a governor.

Fed independence ‘hangs by a thread’

Trump and members of his administration have made no secret about their desire to exert more control over the Fed. Trump has repeatedly demanded that the central bank cut its key rate to as low as 1.3%, from its current level of 4.3%.

Before trying to fire Cook, Trump repeatedly attacked the Fed’s chair, Jerome Powell, for not cutting the short-term interest rate and threatened to fire him as well.

“We’ll have a majority very shortly, so that’ll be good,” Trump said Tuesday, a reference to the fact that if he is able to replace Cook, his appointees will control the Fed’s board by a 4-3 vote.

“The particular case of Governor Cook is not as important as what this latest move shows about the escalation in the assaults on the Fed,” said Jon Faust, an economist at Johns Hopkins and former advisor to Powell. “In my view, Fed independence really now hangs by a thread.”

Some economists do think the Fed should cut more quickly, though virtually none agrees with Trump that it should do so by 3 percentage points. Powell has signaled the Fed is likely to cut by a quarter point in September.

Why economists prefer independent central banks

The Fed wields extensive power over the U.S. economy. By cutting the short-term interest rate it controls — which it typically does when the economy falters — the Fed can make borrowing cheaper and encourage more spending, growth and hiring. When it raises the rate to combat the higher prices that come with inflation, it can weaken the economy and cause job losses.

Most economists have long preferred independent central banks because they can take unpopular steps that elected officials are more likely to avoid. Economic research has shown that nations with independent central banks typically have lower inflation over time.

Elected officials like Trump, however, have much greater incentives to push for lower interest rates, which make it easier for Americans to buy homes and cars and would boost the economy in the short run.

A political Fed could boost inflation

Douglas Elmendorf, an economist at Harvard and former director of the nonpartisan Congressional Budget Office, said that Trump’s demand for the Fed to cut its key rate by 3 percentage points would overstimulate the economy, lifting consumer demand above what the economy can produce and boosting inflation — similar to what happened during the COVID-19 pandemic emergency.

“If the Federal Reserve falls under control of the president, then we’ll end up with higher inflation in this country probably for years to come,” Elmendorf said.

And while the Fed controls a short-term rate, financial markets determine longer-term borrowing costs for mortgages and other loans. And if investors worry that inflation will stay high, they will demand higher yields on government bonds, pushing up borrowing costs across the economy.

In Turkey, for example, President Recep Tayyip Erdogan forced the central bank to keep interest rates low in the early 2020s, even as inflation spiked to 85%. In 2023, Erdogan allowed the central bank more independence, which has helped bring down inflation, but short-term interest rates rose to 50% to fight inflation, and are still 46%.

Other U.S. presidents have badgered the Fed. President Johnson harassed then-Fed Chair William McChesney Martin in the mid-1960s to keep rates low as Johnson ramped up government spending on the Vietnam War and antipoverty programs. And President Nixon pressured then-Chair Arthur Burns to avoid rate hikes in the run-up to the 1972 election. Both episodes are widely blamed for leading to the stubbornly high inflation of the 1960s and ‘70s.

Trump has also argued that the Fed should lower its rate to make it easier for the federal government to finance its tremendous $37-trillion debt load. Yet that threatens to distract the Fed from its congressional mandates of keeping inflation and unemployment low.

Independence vs. accountability

Presidents do have some influence over the Fed through their ability to appoint members of the board, subject to Senate approval. But the Fed was created to be insulated from short-term political pressures. Fed governors are appointed to staggered, 14-year terms to ensure that no single president can appoint too many.

Jane Manners, a law professor at Fordham University, said there is a reason that Congress decided to create independent agencies like the Fed: Lawmakers preferred “decisions that are made from a kind of objective, neutral vantage point grounded in expertise rather than decisions are that are wholly subject to political pressure.”

Yet some Trump administration officials say they want more democratic accountability at the Fed.

In an interview with USA Today, Vice President JD Vance said, “What people who are saying the president has no authority here are effectively saying is that seven economists and lawyers should be able to make an incredibly critical decision for the American people with no democratic input.”

Stephen Miran, a top White House economic advisor, wrote a paper last year advocating for a restructuring of the Fed, including making it much easier for a president to fire governors.

The “overall goal of this design is delivering the economic benefits” of an independent central bank, Miran wrote, “while maintaining a level of accountability that a democratic society must demand.” Trump has nominated Miran to the Fed’s board to replace Adriana Kugler, who stepped down unexpectedly Aug. 1.

There could be more turmoil ahead

Trump said he wants to oust Cook from the Board of Governors because of allegations raised by one of his advisors that she has committed mortgage fraud.

Cook has argued in a lawsuit seeking to block her firing that the claims are a pretext for Trump’s desire to assert more control over the Fed. A court may decide this week whether to temporarily block Cook’s firing while the case makes its way through the legal process.

Cook is accused of claiming two homes as primary residences in July 2021, before she joined the board, which could have led to a lower mortgage rate than if one had been classified as a second home or an investment property. She has suggested in her lawsuit that it may have been a clerical error but hasn’t directly responded to the accusations.

Trump also has personally insulted Powell for months, but his administration now appears much more focused on the Fed’s broader structure.

The Fed makes its interest rate decisions through a committee that consists of the seven governors, including Powell, as well as the 12 presidents of regional Fed banks in cities such as New York, Kansas City and Atlanta. Five of those presidents vote on rates at each meeting. The New York Fed president has a permanent vote, while four others vote on a rotating basis.

While the reserve banks’ boards choose their presidents, the Fed board in Washington can vote to reject them. All 12 presidents will need to be reappointed and approved by the board in February, which could become more contentious if the board votes down one or more of the 12 presidents.

Reappointing the reserve bank presidents and upending that structure would be “the nuclear scenario,” said Adam Posen, president of the Peterson Institute for International Economics.

That, he said, “would be the signal that things are truly going off the rails.”

Rugaber writes for the Associated Press.

President Trump is once again floating the idea of firing Federal Reserve Chair Jerome Powell, ostensibly in objection to excessively high interest rates. But this debate is not about monetary policy. It’s a power play aimed at subordinating America’s central bank to the fiscal needs of the executive branch and Congress. In other words, we have a textbook case of “fiscal dominance” on our hands — and that always ends poorly.

I’m no cheerleader for Powell. During the COVID-19 pandemic, he enthusiastically backed every stimulus package, regardless of size or purpose, as if these involved no trade-offs. Where were the calls for “Fed independence” then? And where were the calls for fiscal restraint after the emergency was over?

Powell failed to anticipate the worst inflation in four decades and repeated for far too long the absurd claim that it was “transitory” even as mounting evidence showed otherwise. He blamed supply-side disruptions long after ports had reopened and goods were moving.

And as inflation was taking a stubborn hold, Powell delayed raising interest rates — possibly to shield the Biden administration from the fiscal fallout of the debt it was piling on — well past the point when monetary tightening was needed.

If this weren’t the world of government, where failure can be rewarded — and if there had been a more obvious alternative — Powell wouldn’t have been invited back for another term. But he was. And so Trump’s pressure campaign to prematurely end Powell’s tenure is dangerous.

I get why with budget deficits exploding and debt-service costs surging, the president wants lower interest rates. That would make the cost of his own fiscal agenda appear more tolerable. Trump likely believes he’s justified because he believes that his tax cuts and deregulation are about to spur huge economic growth.

To be sure, some growth will result, though the effects of deregulation will take a while to arrive. But gains could be swamped by the negative consequences of Trump’s tariffs and erratic tariff threats. No matter what, the new growth won’t lead to enough new tax revenue to escape the need for the government to borrow more. And the more the government borrows, the more intense the pressure on interest rates.

One thing is for sure: The pressure Trump and his people are exerting on the Fed is a push for fiscal dominance. The executive branch wants to use the central bank as a tool to accommodate the government’s frenzy of reckless borrowing. Such political control of a central bank is a hallmark of failed monetary systems in weak institutional settings. History shows where that always leads: to inflation, economic stagnation and financial instability.

So far, Powell is resisting cutting rates, hence the barrage of insults and threat of firing. But now is not the right time to play with fire. Bond yields surged last year as investors reckoned with the scale of U.S. borrowing. They crossed the 5% threshold again recently. Moody’s even stripped the government of its prized AAA credit rating. Lower interest rates from the Fed — especially if seen as the result of raw political pressure — could further diminish the allure of U.S. Treasuries.

While the Fed can temporally influence interest rates, especially in the short run, it cannot override long-term fears of inflation, economic sluggishness and political manipulation of monetary policy driven by unsustainable fiscal policy. That’s where confidence matters, and confidence is eroding.

This is why markets are demanding a premium for funds loaned to a government that is now $36 trillion in debt and shows no intention of slowing down. But it could get worse. If the average interest rate on U.S. debt climbs from 3.3% to 5%, interest payments alone could soar from $900 billion to $2 trillion annually. That would make debt service by far the single largest item in the federal budget — more than Medicare, Social Security, the military or any other program readers care about. And because much of this debt rolls over quickly, higher rates hit fast.

At the end of the day, the bigger problem isn’t Powell’s monetary policy. It’s the federal government’s spending addiction. Trump’s call to replace Powell with someone who will cut rates ignores the real math. Lower short-term interest rates will do only so much if looser monetary policy is perceived as a means of masking reckless budget deficits. That would make higher inflation a certainty, not merely a possibility. It might not arrive before the next election, but it will inevitably arrive.

There is still time to avoid this cliff. Trump is right to worry about surging debt costs, but he’s targeting a symptom. The solution isn’t to fire Powell — it’s to cure the underlying disease, which is excessive government spending.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. This article was produced in collaboration with Creators Syndicate.

WASHINGTON — Federal Reserve Chair Jerome Powell defended the central bank’s response to the COVID-19 pandemic Sunday in a Princeton University commencement speech in which he also praised government employees and U.S. universities, both of which have been targeted by the Trump administration.

The Fed chair and the central bank have been subject to extensive criticism in recent weeks by President Trump and former Fed governor Kevin Warsh, a potential successor to Powell.

In his speech, Powell, who noted he graduated from Princeton 50 years ago, defended the central bank’s decision to cut its key interest rate to nearly zero in response to the pandemic shutdown. It also launched an asset-purchase program that involved buying trillions of dollars of Treasury bonds and mortgage-backed securities, intended to keep longer-term interest rates low.

“With little warning, economies around the world came to a hard stop” as the pandemic hit, Powell said. “The possibility of a long, severe, global depression was staring us in the face. Everyone turned to the government, and to the Federal Reserve in particular as a key first responder.”

Powell singled out longtime government employees for praise: “Career civil servants at the Fed who are veterans of previous crises stepped forward and said, ‘We got this,’” he said.

Trump has subjected Powell to a stream of attacks for months because the Fed has kept its key rate unchanged this year, after cutting it three times at the end of 2024. The president has claimed that there is “no inflation” so the Fed should reduce borrowing costs. Powell has noted that inflation persists.

This month, Trump called Powell a “fool” for not cutting rates and last week called the Fed chair “Too Late Powell.”

Powell has not responded to Trump’s attacks, a stance that has previously won him support among Republicans on Capitol Hill.

In his Sunday speech, he defended American universities, which have come under sharp attacks from the Trump administration as research grants and other funding have been cut for several Ivy League universities, including Princeton.

“Our great universities are the envy of the world and a crucial national asset,” Powell said. “Look around you. I urge you to take none of this for granted.”

Late last month, Warsh, who served as one of the Fed’s governors from 2006 to 2011, slammed the central bank, saying it had allowed inflation to spike to its highest level in four decades in 2022. Warsh is considered a leading candidate to become the next Fed chair when Powell’s term ends next May.

“Each time the Fed jumps into action, the more it expands its size and scope,” Warsh said in a speech on the sidelines of the International Monetary Fund’s spring meetings. “More debt is accumulated … more institutional lines are crossed, and the Fed is compelled to act even more aggressively the next time.”

The Fed does not issue debt, but Warsh and other Fed critics argue that its purchase of Treasury bonds enabled to federal government to borrow and spend more.

Powell has acknowledged that the Fed could have moved quicker to raise interest rates once inflation began to rise in 2021. Still, on Sunday, he defended the Fed’s pandemic record.

“Through the joint efforts of many, we avoided the worst outcomes,” Powell said. “It is hard to imagine the pressure people face at a time like that. Their collective efforts saved our economy, and the career civil servants involved deserve our respect and gratitude; it is my great honor to serve alongside them.”

Rugaber writes for the Associated Press.