Politicization of the Fed raises investor concerns about inflation, rate cuts, and institutional risk.
President Donald Trump certainly isn’t the first president to try to influence the Federal Reserve.
He is the one who’s tried the hardest.
Markets took a beat when he took the unprecedented action of attempting to fire Federal Reserve Governor Lisa Cook for cause in August.
This was not just because his allegations of mortgage fraud against the first Black woman to serve on the Fed’s board were — and still are — unfounded.
Cook’s replacement, handpicked by President Trump, would be a dovish one who would do his bidding to push monetary policy to accelerate lowering interest rates.
Politicization of an independent central bank does not bode well for an economy.
* Research shows that countries with politicized central banks have higher inflation rates.
* Political interference could lead to higher interest rates.
The Supreme Court has set a date next year to hear oral arguments in the historic case.
Investors are watching as potential institutional risks and loss of confidence in the dollar gain traction over the Fed’s future.
White House calls for interest-rate cuts
Shortly after taking office earlier this year, Trump and his allies began to demand the Fed lower interest rates drastically to prevent stagflation and recession and reduce the payments on the nation’s debt.
The Fed wasn’t buying it.
It took a hawkish “wait-and-see” approach to the benchmark Federal Funds Rate, which controls the cost of short-term borrowing.
Fed Chair Jerome Powell said holding the rates steady was prudent to watch the impact of tariff inflation on the supply chain.
Trump began berating Powell personally and professionally, ratcheting up his dismay to openly ponder firing Powell.
A Supreme Court ruling in May put the kibosh on that.
President Trump fires Fed Governor Lisa Cook over mortgage fraud allegations
Enter Trump ally William Pulte, the director of the Federal Housing Finance Agency.
He accused Cook of falsifying records to get a more favorable mortgage rate in 2021, before she was appointed to the Fed by President Joe Biden.
More Federal Reserve:
The president responded by firing Cook “for cause,” the only way a sitting Fed governor may be removed.
Cook denied the allegations and filed suit to retain her seat.
The case made its way up the federal court systems with two federal judges ruling in Cook’s favor.
The Department of Justice appealed to the Supreme Court.
The high court announced Nov. 12 it would hear oral arguments in the case on Jan. 21.
A ruling would come weeks, if not months, later.
Cook has not been charged.
She has retained her seat and participated in Fed activities, including the FOMC meetings pending the high court decision.
The Fed’s only comment was to say it would abide by the court’s ruling.
Investors await Supreme Court ruling regarding Cook
No president has attempted to fire a Fed governor in its 111-year history.
Analysts see President Trump’s aggressive tactics as an effort to stack the central bank with dovish members who would support jumbo rate cuts.
Rhona O’Connell, head of market analysis at StoneX, said in a note on Nov. 12 that the gold market will be paying close attention to this decision in the new year.
“If found in favour of the president, this could be good for a fresh $500 on the gold price on the back of reduced Fed independence vs. political influence,” she said, according to a report in Kitco.
“This would be a bullish factor in itself, but there could be further ramifications from a weaker dollar. If the court finds in favour of Cook, then the reverse would be the case,” O’Connell said.
White House search for Powell replacement on track
Cook is not the only labor-related issue the central bank will face in 2026.
Powell’s term as chair will end in May, and Treasury Secretary Scott Bessent is conducting a search to find a replacement.
Bessent announced five finalists late last month:
* Fed Governor Christopher Waller
* Fed Vice Chair Michelle Bowman
* Kevin Warsh, former Fed governor
* Kevin Hassett, White House National Economic Council Director
* Rick Rieder, BlackRock CIO of global fixed income
As Business Insider reported, Bessent told the White House press pool he will present a “good slate” of candidates to the president right after Thanksgiving, with a decision expected by the end of the year.
