When Federal Reserve Governor Lisa Cook's legal team announced on August 26 that they would sue over Trump's dismissal order, this constitutional crisis triggered by the president's unilateral appointment and dismissal of central bank officials has pushed the political risk of U.S. monetary policy to new heights. At the same time, financial market expectations for a September rate cut are continuing to solidify, with the CME FedWatch tool showing that the probability of a 25 basis point cut in September has reached 86.2%, a significant increase from 75% before Powell's Jackson Hole speech. Amid the dual pull of judicial confrontation and expectations of policy easing, next week's non-farm employment data and core PCE inflation report will become key benchmarks for testing the rationality of the Fed's policy shift.
Policy maneuvering: from verbal pressure to judicial confrontation.
A series of recent actions by the Trump administration are breaking through the traditional boundaries of the independence of the U.S. central bank. On August 25 local time, Trump fired Federal Reserve Governor Cook on grounds of "suspected mortgage fraud," marking the first time a president has dismissed a Fed governor without clear legal basis since the implementation of the Federal Reserve Act. The Fed subsequently issued a statement emphasizing that, according to legal provisions, governors enjoy "long terms and protection from removal," and can only be dismissed "for just cause." Cook has clearly stated through his lawyer that he will seek judicial review to confirm his qualification to serve.
Behind this constitutional crisis is Trump’s ongoing pressure on monetary policy. In a speech on August 26, the president candidly stated: "We will soon have a majority on the Federal Reserve Board, which is great. Once we gain majority support, interest rates must go down to address housing costs." Currently, Trump has appointed 2 of the 7 seats on the Fed Board, and he plans to nominate economic advisor Stephen Moore to replace the soon-to-resign Cook, hinting at potentially moving Moore to Cook's long-term seat (term until 2038), thereby exerting substantial influence on monetary policy through personnel arrangements.
Historical experience shows that the Fed's policy independence has never faced such a direct challenge. Unlike in 2018-2019 when Trump only criticized Powell's rate hikes via Twitter, the current interference has escalated from rhetoric to an institutional power struggle. Former Assistant Secretary of the Treasury Mark Sobel commented: "If the president can dismiss dissenting governors at will, the Fed's data-driven decision-making mechanism will collapse completely." The market has reacted sensitively; on August 27, U.S. bank stocks fell 1.8%, reflecting investors' concerns about the erosion of central bank credibility.
Rate cut logic: from data dependence to risk balance.
The internal policy shift within the Federal Reserve has laid the groundwork for a rate cut in September. At the Jackson Hole annual meeting on August 22, Chairman Powell sent clear dovish signals, pointing out that "the current situation suggests that employment growth faces downward risks, and changes in the risk balance may require policy adjustments," marking a shift from last year's "inflation priority" to a new framework of "employment risk prioritization." Powell particularly emphasized that in the context of maintaining tight policy, changes in the economic outlook and risks may require adjustments to the policy stance, a statement interpreted by institutions such as Barclays and BNP Paribas as "opening a policy window for a rate cut in September."
The latest economic data provides a dual basis for interest rate cuts. On one hand, the job market has cooled significantly, with the U.S. adding only 73,000 non-farm jobs in July, far below expectations and with the previous two months' data revised down by 258,000. The unemployment rate slightly rose to 4.2%, and the corporate hiring rate has dropped to a seven-month low. Federal Reserve Governor Waller explicitly stated on August 29: "The downward risks facing the labor market have intensified, and appropriate risk management means that interest rates should be cut immediately." He also expressed support for a 25 basis point rate cut in September and expects further cuts in the next 3-6 months.
On the other hand, inflationary pressures show structural differentiation. The overall CPI in July remained stable at 2.7% year-on-year, but the core CPI rose to 3.1% year-on-year, exceeding the Fed's 2% target. This characteristic of "overall stability, core rebound" (as noted by Dong Zhongyun from AVIC Securities) complicates the decision-making process for interest rate cuts. Powell acknowledged in his speech that the impact of tariffs on consumer prices has become evident, but insisted that these impacts may be "transitory," and the Fed will not allow them to evolve into a persistent inflation issue, providing theoretical support for rate cuts while inflation has not yet met the target.
The market has clearly priced in the path for interest rate cuts. In addition to an 86.2% probability of a rate cut in September, interest rate futures indicate that the cumulative rate cut by the end of the year will reach 55 basis points, suggesting another potential 25 basis point cut in December. Barclays has brought forward its rate cut expectations from September 2026 to September 2025, predicting two rate cuts this year, consistent with predictions from BNP Paribas. This expectation has driven the 10-year U.S. Treasury yield down from 4.3% at the beginning of August to the current 4.05%, while the dollar index has hit a new low since November 2024, and the offshore yuan has broken through the 7.12 level against the dollar.
Next week’s focus: data validation and policy expectation calibration.
Upcoming economic data will serve as the "final test" for rate cut expectations. Market focus is highly concentrated on two major indicators: first, the core Personal Consumption Expenditures (PCE) price index to be released on Friday—this is the Fed's preferred measure of inflation; second, the August non-farm employment report to be released next Friday, from which investors will assess whether the cooling of the job market is persistent. Deutsche Bank Chief Economist Matthew Luzetti pointed out: "If the core PCE falls below 2.8% and non-farm job additions are below 100,000, a rate cut in September will be a certainty."
Intensive speeches from Fed officials are also worth noting. Next week, six officials, including New York Fed President Williams and San Francisco Fed President Daly, will make public remarks, from which the market will gauge the degree of disagreement within the policy committee. Williams previously hinted that the September meeting is "full of variables," emphasizing that decisions will depend on the latest data; this vague statement reflects both internal maneuvering and retains flexibility for policy adjustment. Analysts expect that officials may strengthen communication on "gradual rate cuts" to ease market concerns about a rebound in inflation.
The global policy environment provides external support for the Fed to cut rates. The European Central Bank has cut rates four times in 2025, with the main refinancing rate cumulatively reduced by 100 basis points to 2.15%, nearing the end of the current rate-cutting cycle. The National Financial and Development Laboratory report points out that a "policy resonance" has formed among major global central banks; if the Fed clings to high rates, it will lead to excessive strengthening of the dollar, exacerbating export pressures and financial market volatility. This external environment further compresses the Fed's policy choice space.
Risk warning: political interference and market pricing divergence.
The current macro environment harbors three nested risks that warrant caution. The most immediate risk is the escalation of judicial confrontation; if the court rules that Trump’s dismissal is unconstitutional, it could intensify tensions between the executive branch and the central bank, leading to soaring policy uncertainty. Conversely, if Trump prevails, it could set a dangerous precedent for presidents to arbitrarily appoint and dismiss Fed governors, undermining the central bank's credibility in the long term. Historians note that since the 'Accord' was reached between the Treasury and the Fed in 1951, the U.S. has never faced such a severe crisis of politicization of monetary policy.
Deeper risks lie in the internal conflict of policy logic. The tariff policies of the Trump administration have raised the actual tariff rate in the U.S. to 17%. Research from Yale University shows this will push up prices by 2.1%, equivalent to an annual loss of $2,800 per household. Forcing a rate cut against the backdrop of cost-push inflation from tariffs could solidify the risk of "stagflation." The National Financial and Development Laboratory warns that if the Fed is forced to cut rates due to political pressure, the risk of the core CPI remaining above 3.5% will rise significantly.
The divergence between market pricing and the actual policy path cannot be ignored. Although the current expectation for a rate cut is as high as 86.2%, the minutes from the Fed's July meeting show that the vast majority of officials still believe that "the upward risks of inflation are more severe." This divergence means that if next week's data comes in stronger than expected, the market may face a sharp correction in expectations. Goldman Sachs' strategy team pointed out that the S&P 500 index has partially priced in the benefits of a rate cut, and if policy expectations fall short, it may trigger a 3-5% pullback.
Next week's macro evolution will revolve around the triangular relationship of "political maneuvering - data validation - policy pricing." As the judicial confrontation between Trump and the Fed enters a critical stage, even minor changes in economic data could trigger significant market volatility. For investors, rather than chasing the 86.2% probability of a rate cut, it is better to closely monitor the subtle changes in Powell's "risk balance" statements—this is the key to understanding the logic of the Fed's policy shift. Regardless of whether a rate cut occurs in September, this battle between monetary policy and political power will leave a profound mark in the history of the U.S. central bank.#特朗普概念币 #降息期待
