When Trump published an open letter on social media dismissing Federal Reserve Governor Lisa Cook, it not only set a precedent for a president firing a governor in the history of the U.S. central bank but also ignited a 'total war' against the independence of the Federal Reserve. This battle is aimed not only at the seven-member board in Washington but extends to the 'power hinterland' formed by the 12 regional Feds. Through manipulating personnel appointments and intervening in reappointment procedures, the Trump administration is attempting to reshape the Federal Reserve's decision-making DNA to serve short-term political demands. This action has not only triggered violent fluctuations in the financial markets but also put the institutional firewall that maintains the credibility of U.S. monetary policy to an unprecedented test.
From board majority to regional Fed infiltration
The legal basis for Trump's dismissal of Cook has sparked widespread controversy in academia and the judiciary. According to the Federal Reserve Act, Federal Reserve Board members have a 14-year term guarantee and can only be removed for 'cause', a principle established as an important precedent to limit presidential power in the 1935 case 'Humphrey's Executor v. United States'. The 'mortgage fraud' allegations cited by Trump's team have not been confirmed through judicial procedures, and several former federal prosecutors have publicly questioned their legitimacy, viewing it more as a 'political performance' than a legitimate reprimand. Cook's lawyer has clearly stated that they will file a lawsuit, and this legal battle will determine whether Trump can quickly install loyalists in the seven-member board, establishing majority control.
The competition for a majority position on the board is crucial because it directly relates to influence over the regional Fed presidents. According to the current mechanism, the selection of regional Fed presidents is recommended by local boards but must be approved by the Federal Reserve Board; the reappointment vote held every five years is entirely controlled by the board. Economist Derek Tang from LHMeyer/Monetary Policy Analytics points out that what was once seen as a 'formality' for the reappointment vote is becoming a key tool for pressure from the Trump administration. Once the board is occupied by Trump's nominees, those regional Fed presidents with hawkish positions on interest rate policy might face obstacles in reappointment, being forced to compromise on their policy positions.
This infiltration strategy has triggered widespread panic among regional Federal Reserve banks. Insiders revealed that after the news of Cook's dismissal broke, several regional Fed presidents held emergency phone calls to discuss the survival crisis. Current FOMC voting members, especially New York Fed President Williams, are particularly worried that their policy positions may become the basis for the next round of political reckoning. Even more concerning is that among the Federal Reserve Chair candidates being interviewed by U.S. Treasury Secretary Basant, those not selected could be placed in regional Fed president positions, a 'parachute' operation that would completely disrupt the traditional selection mechanism of regional Feds.
FOMC Reconstruction and the Crisis of Monetary Policy Credibility
The decision-making balance of the Federal Open Market Committee (FOMC) is at risk of being disrupted. This core decision-making body, composed of 7 governors and 5 regional Fed presidents, has long maintained a power balance between the board and regional Feds. Regional Fed presidents, due to their non-political appointments, often become an important force resisting short-term political pressures. Former Federal Reserve Vice Chair Lael Brainard warned that any attempt to reorganize the FOMC through political means would 'amount to an unprecedented shock to the independence of the Federal Reserve', potentially leading to uncontrollable inflation and soaring long-term interest rates.
Historical lessons are vividly evident. In the 1970s, President Nixon summoned Federal Reserve Chairman Burns multiple times to pressure him to lower interest rates, ultimately leading to nearly 15% annualized hyperinflation, an event that has become a classic counter-example for central banks defending their independence. The current economic environment bears a striking resemblance to that time: Trump's comprehensive tariff policy has begun to push up commodity prices, and the Federal Reserve led by Powell has been reluctant to lower rates due to concerns about a rebound in inflation; this policy restraint has become the primary target of Trump's attacks. On Tuesday, Trump openly declared: 'Once we get the majority vote, the housing issue will improve... We must lower interest rates a bit,' exposing his intention to instrumentalize monetary policy.
Disagreements within the Federal Reserve further exacerbate risks. According to recent statements, Cleveland Fed President Beth Hammack and other hawks clearly oppose rate cuts, believing that inflation threats still exist; while doves are concerned about a weak job market and advocate for multiple rate cuts; the moderates led by Powell are trying to seek a balance between the two. Once this delicate balance is disrupted by political appointments, it could lead to excessively loose monetary policy. Morgan Stanley previously warned that the easing cycle without an economic recession is usually short-lived and has limited effects, and political interference will only amplify the probability of policy errors.
The market has begun to price in this risk. Although the expectation for a rate cut in September remains at 82%, long-term Treasury yields have risen unusually, with the 10-year U.S. Treasury yield increasing by 15 basis points since the beginning of the month, reflecting investors' concerns about a rebound in inflation and damage to the creditworthiness of the dollar. This contradictory phenomenon of 'rate cut expectations coexisting with rising yields' is reminiscent of the 'policy paradox' seen in the Federal Reserve's easing cycle in 2024, suggesting that the market is questioning the sustainability of monetary policy.
From dollar hegemony to loss of institutional premium
Trump's actions not only impact the domestic monetary policy framework in the U.S., but could also undermine global confidence in the dollar system. As the issuer of the world's reserve currency, the independence of the Federal Reserve is a crucial pillar of the dollar's creditworthiness. Central bank governors from multiple countries have publicly expressed concerns, believing that U.S. political interference in central bank decision-making will 'undermine the stability of global monetary policy'. This concern is not unfounded — when central banks lose their autonomy in policy making, the predictability and credibility of their decisions will significantly decline, ultimately leading to capital flight and currency devaluation.
From a historical perspective, the independence of the Federal Reserve is not innate but an institutional advantage formed through a century of evolution. The 'political insulation' design established by the Federal Reserve Act in 1913 was once viewed as a key innovation to avoid repeating the financial panic of 1907. Now, this design is facing the most severe challenges. Trump's economic team accuses the Federal Reserve of 'failing to address inflation' and 'poor regulation', reasons that are interpreted by the outside world as excuses to rewrite the rules. In fact, the selection mechanism for regional Fed presidents without Senate confirmation was originally intended to avoid political manipulation, but now has become an 'institutional loophole' under attack.
The more profound impact lies in the accelerated reconstruction of the global monetary system. If the Federal Reserve becomes a political tool, emerging markets may accelerate the 'de-dollarization' process, reducing their reliance on dollar assets. Data shows that in recent years, the dollar's share in global foreign exchange reserves has decreased from 72% to 59%, and Trump's actions may further weaken countries' willingness to hold dollars. For the U.S., this means rising financing costs — foreign investors hold about 30% of U.S. Treasury securities, and if demand declines, the Treasury will be forced to pay higher interest rates, exacerbating the debt burden.
The outcome of this power struggle will determine the institutional DNA of the Federal Reserve. If Trump succeeds in politicizing monetary policy, he may gain the 'sweetness' of short-term economic stimulus through rate cuts, but in the long run, he will lose the 'institutional premium' of central bank independence. As former Federal Reserve Vice Chair Alan Blinder said: 'Trump is trying to end this independence, making the Federal Reserve a government appendage. If this happens, it will have extremely serious negative consequences for monetary policy.' The market may briefly celebrate the liquidity feast brought by rate cuts, but ultimately, it will pay a heavy price for losing the 'last policy anchor'.
In this struggle concerning the future of the economy, every legal lawsuit, every board vote, and every piece of inflation data becomes crucial. Whether the Federal Reserve can maintain its independence not only determines whether the U.S. economy can avoid repeating the mistakes of the 1970s but will also influence the stable foundation of the global monetary system. When political forces continually erode the decision-making space of professional institutions, the market will ultimately vote with its feet — this may be the most powerful warning to the Trump administration and the ultimate test of the Federal Reserve's defense of institutional dignity.
