Why You Should Care About Trump’s Move to Fire the Fed’s Lisa Cook

President Donald Trump’s move to fire a senior Fed official marks a new chapter in his effort to bend the central bank to his will. It could have significant consequences for the economy and your finances.

Trump on Monday night said he had “removed” Federal Reserve governor Lisa Cook, a member of the 12-person committee that votes on interest rate, accusing her of falsifying information on a mortgage application. Cook has said she intends to fight Trump’s action in court and does not plan to resign.

Trump has also harshly criticized Fed Chair Jerome Powell as the central bank has kept rates steady in recent meetings, despite his preference for deep cuts. Some experts say the president risks undermining the central bank’s ability to perform one of its main functions: keeping inflation in check.

“It’s all part of a pattern here to actually reduce the independence of the Fed,” said Frederic Mishkin, a former Fed governor who was appointed by President George W. Bush, on CNBC Tuesday. “This is exactly what Trump should not want to have happen, because it’s going to lead to higher interest rates because the loss of credibility of the central bank leads to higher expectations of inflation, and therefore higher interest rates.”

Why the Fed Has Kept Rates Higher Lately

Trump’s move to fire Cook is part of an ongoing campaign to push the central bank to lower the fed funds rate, which determines the rate at which banks borrow money from one another and influences borrowing costs on short-term loans.

The Fed’s policy committee meets eight times a year to set interest rates and discuss monetary policy. Another member, Fed Governor Adriana Kugler, earlier this month said she would step down, with Trump nominating Stephen Miran, head of the White House Council of Economic Advisors, as her replacement.

During the committee’s July meeting, governors Michelle Bowman and Christopher Waller dissented from the consensus, calling for cuts and marking the first occasion of multiple dissents in decades. The Fed has kept the rate elevated since 2022, in an effort to subdue the post-pandemic flare-up of inflation. A higher fed funds rate pushes up rates on all kinds of loans, discourages borrowing and spending, and cools down the economy.

In the short term, lower rates could boost the economy and the job market, and reduce the amount of interest the federal government pays on the national debt. However, those benefits could come at a cost to long-term financial stability, experts have warned.

The Fed is set up to be independent from direct control of the White House, insulating it from the kind of political pressure Trump is applying. The theory is that independence allows Fed officials to make unpopular decisions that benefit the economy over time, without worrying about pleasing voters or politicians.

The poster boy for the Fed’s independence is former fed chair Paul Volcker, who led the Fed’s fight against inflation in the 1980s, cranking the fed funds rate to nearly 20%. The high interest rates decimated the job market, but inflation subsided and the economy bounced back.

‘Markets Run on Trust’

Some experts fear that if instead of following good economic policy, Fed officials will act according to the whims of the White House, keeping interest rates low regardless of inflation rates.

Trump’s attempt to fire Cook is a “kill shot at Fed independence,” Aaron Klein, senior fellow of economic independence at the Brookings Institution, said on social media and in an interview with Bloomberg.

“Markets run on trust,” climate investor and Trump critic Tom Steyer posted on social media Tuesday. “Firing Fed Governor Lisa Cook for political reasons torpedoes the credibility of the Fed..and America’s economy. Mark my words: the destruction of Fed independence = higher inflation.”

Academic studies have shown countries with more independent central banks tend to have lower inflation and better economic performance than those that are more heavily influenced by politicians.

Defenders of the Fed’s independence can point to numerous examples of what happens when a country’s central bank falls under the control of a political leader. Turkey’s inflation rate soared to 85% in 2022 after its authoritarian president, Recep Tayyip Erdoğan, pressured its central bank to lower rates.

The American Enterprise Institute, a right-leaning think tank, called the Turkish experience a “cautionary tale” about central bank independence.

A Loss of Credibility Could Mean Costlier Loans

The pressure to lower interest rates could also result in costlier loans, some believe.

That’s because interest rates on U.S. Treasury bonds are not set by the government, but by financial markets. If investors lose faith in the Fed’s credibility, those long-term rates could rise, pushing up rates on mortgages and other long-term loans.

“Investors will demand higher premiums to hold on to U.S. Treasury bonds (and other long-term bonds), because without faith that the Federal Reserve will tamp down inflationary pressures when they appear, they will need reassurance—in the form of higher long-term interest rates—to hold on to these investments,” wrote Heidi Shierholz, president of the progressive Economic Policy Institute think tank, in a commentary.