A president has moved from berating the central bank to trying to bend it to his will. The attempt to sack Federal Reserve Governor Lisa Cook — unprecedented in the Fed’s 111-year history — has hurled an arcane legal clause into the centre of US macroeconomic management. Whatever the courts decide, the signal to markets is unmistakable: monetary policy is in the political crosshairs. That assault on central bank independence will not tame inflation; it will raise the economy’s temperature and its risk premium, with consequences felt first in Treasury yields and mortgage rates and then across the real economy.
The Federal Reserve Act grants governors 14-year terms and removal only “for cause,” a guardrail designed to insulate monetary policy from electoral cycles. The Board’s decisions, and the FOMC’s majority votes, derive authority from that insulation. Undermining it by stretching “cause” to fit unproven allegations invites judicial clarification, congressional pushback, and market distrust.
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Cook has vowed to challenge the action; the Fed has reiterated that governors may be removed only “for cause,” reflecting Congress’s intent. The immediate issue will likely reach the Supreme Court; the larger issue is whether the White House can intimidate the Fed into rate cuts on a political timetable. Markets do not wait for law reviews: they re-price risk when norms are broken.
Fed credibility anchors borrowing costs
A central bank’s power rests less on its policy rate than on its credibility to keep inflation low and stable. When investors suspect policy is politicised, they demand a premium to lend long. That premium lifts the entire yield curve, including mortgages, auto loans, and corporate debt — precisely the costs voters feel. The IMF has warned that recent successes in disinflation relied on central banks’ independence and credibility; erode those, and the cost of disinflation rises. This week’s drama has already nudged Treasury yields higher as political risk is priced in. The irony is stark: an effort ostensibly aimed at cheaper credit will deliver the opposite through higher long-term rates.
The United States has seen this movie. In the early 1970s, President Richard Nixon leaned on Fed Chair Arthur Burns to run the economy hot ahead of the election. Scholarship based on the Nixon tapes documents that pressure; the outcome is also a matter of record — entrenched inflation and the stagflationary morass that followed. Where persuasion ends and capitulation begins is always debated; the macroeconomic aftermath is not.
More recently, Turkey offers a modern cautionary tale. Political direction of interest rates there produced a lira collapse and inflation that soared past 80 per cent. The lesson in both episodes is clear: subordinating monetary policy to short-term politics raises inflation expectations, weakens the currency, and ultimately forces harsher tightening later. America is not Turkey, but markets do not grant exemptions for hubris.
A quieter route to control
Even if courts block the firing, the strategy has other prongs: nominations that shift the Fed’s internal balance and procedural levers that reshape the system beneath the headline rate. Stephen Miran, the White House economic adviser and vocal advocate of looser policy, has been tapped to fill a Board vacancy. If additional seats are secured, a Board majority can influence budget, staffing and, crucially, the approval of regional Reserve Bank presidents who rotate onto the FOMC.
Statute gives local directors a first say, but the Board in Washington retains veto power over those choices and reappointments. A majority aligned to the White House would not need to win every rate vote to change the institution’s incentives and personnel. The Senate Banking Committee’s handling of Miran’s confirmation — now inescapably entangled with the Cook saga — will therefore be a test of whether Congress will protect the Fed’s independence that it itself designed.
For now, the moves are modest. Treasury yields a touch higher, the dollar a shade softer, but the direction is telling. Investors are not pricing the next quarter-point cut; they are pricing institutional risk. If they come to believe the White House sets interest rates, the 10-year yield will not oblige with a political script. It will rise, dragging mortgage rates with it, worsening housing affordability and dampening investment. Once credibility breaks, the bill comes due in higher term premia and a higher neutral rate. The U.S. benefits from the dollar’s reserve status; squandering the Fed’s autonomy toys with that privilege. The Treasury market is the world’s benchmark; politicising the Fed destabilises its anchor.
Costs of cheap money by decree
Cutting policy rates into a still-warm inflation environment does not deliver prosperity; it delivers a sugar high that quickly sours. Demand is overstimulated; supply cannot keep up; inflation expectations creep; long-term borrowing costs, set by wary investors, climb. Households refinancing at higher mortgages and firms rolling debt at wider spreads will not thank a White House that chased headline-friendly “cheap money” while setting off an inflation-rate spiral. That paradox has been widely flagged by economists: the more markets think the White House runs the Fed, the higher long-term rates are likely to go. Political ownership of the yield curve is a dangerous illusion.
Congress and the courts must act in concert. First, the Senate should treat every Fed nomination as a referendum on independence: no confirmation without an explicit, written commitment to the dual mandate, the 2 percent inflation goal, and freedom from political instruction. The Senate Banking Committee should also condition consideration of new nominees on a cessation of attempts to remove sitting governors absent demonstrable malfeasance established through due process. Second, the judiciary should clarify that “for cause” is a high bar—limited to proven misconduct or incapacity—not a pretext for policy disagreement.
Third, Congress should reaffirm in statute what has been practice: Board oversight of Reserve Bank presidents must remain merit-based and insulated from partisan pressures, with transparent criteria and published reappointment decisions. Finally, fiscal and trade policy should stop leaning on the Fed. A coherent, medium-term fiscal path and predictable tariff policy will do more to lower inflation expectations—and interest rates—than any presidential tweet about the fed funds rate. Guard the institution now, or pay for its politicisation in volatility, inflation, and lost growth later.