Federal Reserve Governor
President Trump's termination of the Federal Reserve governor is causing great concern in the financial markets. The reason for the anxiety is that the Federal Reserve has generally acted as a board independent of political pressure. The belief is that this termination is designed to allow a specific interest rate perspective to seep into the Federal Reserve Board’s policy.
It's important to recognize that Chairman Powell has already stated that he believes interest rate costs may be forthcoming. The jobs market is beginning to show signs of stress, and many economists are of the impression that parts of the economy are already in a recession.
It's very likely interest rates will fall in response to soft jobs numbers, but that has the potential to increase inflation. It's a difficult tight rope the Federal Reserve is walking, and it remains to be seen how independent they will be given political pressures.
The bottom line is we expect soft interest rates and slow economic growth. We do not expect some catastrophic collapse of the economic system because of a Federal Reserve official's replacement. But it does reflect the new reality that we have a highly active executive branch that is willing to insert its perspectives in a variety of institutions, including the Federal Reserve.
A recent article highlighted the termination of the Federal Reserve governor. See several paragraphs below for a description of what has occurred this week.
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“Federal Reserve governor Lisa Cook will file a lawsuit challenging her removal by President Donald Trump, setting up a potential standoff between the president and the US central bank.
"President Trump has no authority to remove Federal Reserve Governor Lisa Cook," her lawyer Abbe David Lowell said in a statement.
The president has said there was "sufficient reason" to believe Cook had made false statements on her mortgage, and cited constitutional powers which he said allowed him to remove her.
The unprecedented move comes as Trump has put increasing pressure on the Fed - especially its chair Jerome Powell - over what he sees as an unwillingness to lower interest rates.
Long-dated US government securities sold off on Tuesday, hinting at increased perceived risk by investors worried that Trump's attempted firing of a Fed governor could undermine faith in the central bank.
If investors start to doubt the Fed's credibility, borrowing costs for the US government could rise – and that would have knock-on effects around the world since they are used to set the price of assets around the world.
Cook is one of seven members of the Fed's board of governors, and in this position sits on the 12-member committee which is responsible for setting interest rates in the US.
"His attempt to fire her, based solely on a referral letter, lacks any factual or legal basis," Cook's lawyer said on Tuesday. "We will be filing a lawsuit challenging this illegal action."
The Federal Reserve weighed in too.
"Congress, through the Federal Reserve Act, directs that governors serve in long, fixed terms and may be removed by the president only 'for cause'," the central bank said in a statement. "Long tenures and removal protections for governors serve as a vital safeguard, ensuring that monetary policy decisions are based on data, economic analysis, and the long-term interests of the American people."”
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