The Federal Reserve has long been known for its independence.
If the U.S. economy is a giant ship, then the Federal Reserve governors are the crew at the helm. They are responsible for independent, politically uninfluenced policy adjustments based on economic data to ensure the smooth sailing of the ship.
However, today, an executive order signed by Trump attempts to dismiss Governor Cook (Lisa Cook) on the grounds of 'mortgage fraud'.
While this may sound like a Trump-style political farce, the implications of this action are a significant shock to the American financial system and even global economic stability. It is not merely 'the president wants to fire an official he dislikes', but resembles a public challenge to the century-long independence of the Federal Reserve, bringing this institution, which is supposed to be above politics, into the forefront of political struggle.
1. Does the president have the authority to dismiss Federal Reserve governors? A lawsuit destined to reach the Supreme Court
The most fundamental question we must face is: Does the president have the power to dismiss Federal Reserve governors?
The answer is: currently no, but there is a legal gray area.
According to the (Federal Reserve Act), Federal Reserve governors are nominated by the president and confirmed by the Senate, serving terms of up to 14 years. To safeguard the independence of the Federal Reserve, the law stipulates that the president must have 'legitimate reasons' (for cause) to dismiss a governor. This 'legitimate reason' refers to substantive issues such as misconduct or dereliction of duty, rather than policy disagreements.
It is important to clarify that the Federal Reserve is not a government executive department, but an 'independent federal agency'. As early as 1935, the U.S. Supreme Court established a key principle in the case of (Humphrey's Executor v. United States): the U.S. president cannot dismiss officials of independent agencies solely due to policy disagreements. This precedent has become the cornerstone of federal agency independence.
Currently, Trump publicly alleges that Cook is involved in 'mortgage fraud' and uses this as a reason to exercise presidential executive power to dismiss her. However, Cook's lawyer counters that this is entirely fabricated and seems to resemble a version of 'baseless accusations' in the U.S.
The crux of this debate is: Does the president have the authority to define and adjudicate this 'legitimate reason'? Is there a need for an independent legal process to determine this matter?
If Trump insists on dismissing Cook, this lawsuit will almost certainly reach the Supreme Court, and the Court's ruling will completely rewrite the history of financial regulation in the United States.
2. Publicly challenging, how important are Federal Reserve governors?
Why did Trump go to such lengths to dismiss a Federal Reserve governor, risking a massive public outcry?
To understand this matter, we must recognize the status and role of Federal Reserve governors.
The highest decision-making body of the Federal Reserve is the Federal Open Market Committee (FOMC), which is responsible for formulating U.S. monetary policy, including the critical interest rate decisions.
The FOMC has a total of 12 members, including:
7 members of the Federal Reserve Board
President of the Federal Reserve Bank of New York
The remaining four are rotated among the presidents of the other 11 regional Federal Reserve Banks
Therefore, the council members form a fixed majority in the FOMC, holding decisive influence over interest rate decisions.
Cook's policy proposals adhere to the Federal Reserve's dual mandate of 'stabilizing prices' and 'maximizing employment'. In the current situation where inflation has not yet fully returned to target levels, she supports maintaining high interest rates rather than cutting them immediately.
This is in stark contrast to Trump's policy direction of ignoring inflation and directly cutting interest rates to stimulate the economy, and his intent to dismiss Cook is clear: he wants to replace a decision-maker with policy disagreements to guide the Federal Reserve onto his desired 'interest rate cut path' in the future.
If this move succeeds, it will inevitably affect other sitting governors, and perhaps a more 'compliant' Federal Reserve will emerge.
3. Unprecedented, is the independence of the Federal Reserve already in jeopardy?
Historically, the relationship between U.S. presidents and the Federal Reserve has been subtle and complex.
Presidents can publicly criticize the Federal Reserve, exert pressure privately, and even change the composition of the committee by nominating new governors, but no president has ever attempted to directly dismiss a sitting Federal Reserve governor. Historically:
President Roosevelt attempted to restructure the Federal Reserve during the Great Depression but ultimately did not succeed in directly dismissing a governor.
President Nixon publicly pressured Federal Reserve Chairman Burns to lower interest rates before the election, although Burns ultimately yielded, Nixon did not directly dismiss him.
Trump's actions mark the first time in American history that he has broken the long-standing tacit understanding of 'the government does not directly interfere with Federal Reserve personnel'.
This is not just against Cook personally, but a public declaration of war against the Federal Reserve as an independent institution. If he succeeds, it will set a dangerous precedent, allowing any future president to dismiss governors opposed to their policies with 'baseless' justifications.
At that point, the Federal Reserve will become an 'auxiliary agency' of the president, and its decisions will no longer be based on economic data but will be subject to the short-term goals of politicians.
A non-independent Federal Reserve will bring tremendous risks. The most immediate consequence is that inflation could spiral out of control.
When monetary policy is subject to political influence, politicians tend to lower interest rates to stimulate the economy to gain voter support in the short term. However, overly loose monetary policy ultimately leads to currency devaluation and triggers long-term inflation.
4. Looking ahead, what impact will this have on the market and cryptocurrency?
The independence of the Federal Reserve is one of the cornerstones of global financial market stability. How will the market react when this cornerstone is shaken?
In the short term, as the market expects that the future Federal Reserve may be more inclined to cut interest rates, this could provide some support for the stock market, especially for interest-sensitive tech stocks.
In the long run, this will lead to immense uncertainty and panic. Investors will worry that future U.S. monetary policy will no longer be predictable, thereby diminishing confidence in the dollar and U.S. Treasury bonds. This could lead to a weaker dollar and rising bond yields, as investors will demand higher returns to compensate for the increasing risks.
As for the cryptocurrency market, the impact of this event is not direct, but there is an inherent connection.
The weakness of the cryptocurrency market is closely tied to the fragility of the global macroeconomic environment. The incident of Trump dismissing Cook is a concentrated manifestation of this fragility.
On one hand, this incident exacerbates macroeconomic and political uncertainty. As investors lose confidence in the dollar and traditional financial systems, some may choose to turn to cryptocurrencies like Bitcoin as a 'decentralized' safe haven. From this perspective, the weakening of the Federal Reserve's independence may ironically become a potential boon for the cryptocurrency market.
On the other hand, Trump's substantial support for cryptocurrency, including establishing a 'National Strategic Reserve' and other policies, tightly connects the cryptocurrency market to him like never before. If Trump loses a key policy battle, it will inevitably shift the sentiment in the cryptocurrency market.
In summary, Trump's dismissal of Cook shakes not just the Federal Reserve as an institution. It challenges the core principles of the American financial system, tests the boundaries of the law, and pulls an institution that should serve as an economic referee into a politically charged storm of uncertainty. The markets at the center of this storm are bound to be shaken until a new balance is achieved.
