The market is primarily concerned that Donald Trump's attempts to replace opponents in the Fed's board of directors with supporters risk causing significant damage to the central bank's credibility and potential, according to Roine Vestman, professor of economics at Stockholm University and head of the monetary policy research center Cemof.
Credibility comes with independence, that the central bank will prioritize the inflation target, he says to TT.
”Can become really troublesome”
A consequence could be that inflation expectations among households, companies, and market players become unstable, which would make it more difficult to achieve the inflation target, according to Vestman.
Everyone working at the Fed knows what is at stake. And ultimately, Trump has economic reality against him – if he goes after the Fed, interest rates and budget deficits will increase, which will hit the economy and him, says Vestman.
The nightmare, according to Vestman, is that a perception is established that the US President indirectly controls the Fed's monetary policy. The consequences would be felt far beyond the US borders.
It would likely start with higher market interest rates in the US and decreased confidence in the dollar. This would lead to deeper budget deficits in the US. If we simultaneously get an inflation impulse like a few years ago and the Fed chooses not to prioritize the inflation target, it can become really troublesome.
In the bond market, the gap between 30-year and 5-year US government bonds – an indicator of so-called interest rate chill – has been pushed up to just over 1.17 percentage points. This is the largest interest rate gap between the bonds since 2021.
The dollar is also being pushed against leading currencies – although the krona has had a little trouble asserting itself this week.
”Must be stopped in court”
If the legal process that is now pending ends with Lisa Cook being forced to interrupt her term prematurely, it would create a vacancy in the Fed's board of directors. This could be used by Donald Trump to get a more favorably inclined member into the board.
At a televised government meeting on Tuesday, Donald Trump said he has several "very good people" whom he is considering nominating to take over after Lisa Cook.
The criticism from the opposition in the US is not unexpectedly harsh.
“It is an authoritarian exercise of power that blatantly violates the central bank law and must be stopped in court”, writes Elizabeth Warren, leading Democrat in the Senate's banking committee, in a statement.
Donald Trump's attempts to fire Lisa Cook – nominated by former President Joe Biden and with a term approved by the US Senate over three years ago, which extends to 2038 – follow a year marked by repeated attacks from the Trump administration against Fed Chairman Jerome Powell and his board. It is mainly about the Fed not stimulating the economy with lower interest rates.
It is enough with unconfirmed allegations against Lisa Cook that she is said to have falsified mortgage documents for her to be able to be fired as a board member in the US central bank Federal Reserve (Fed), according to Donald Trump.
Lisa Cook – who is accused of having received more favorable loan terms by stating two different primary residences in two separate mortgage applications – responded the next day that she will not leave her position. She says there is no reason for dismissal. Additionally, she claims that the US President lacks the mandate to make such a decision.
The legal battle between the parties that is now expected will likely end in the US Supreme Court.
The Fed has stated in a statement that the central bank will follow court decisions regarding Lisa Cook's conditions for completing her term as a Fed board member, but that no decisions will be made until the matter is legally settled.
Sources: Bloomberg, The Wall Street Journal
