Whether Lisa Cook stays or goes, the Senate must confirm only Fed governors who are independent of partisan politics and of the president.
President Trump’s attempt to fire Federal Reserve Board governor Lisa Cook is dangerous and a threat to long-term prosperity. The Senate needs to be watching carefully, being sure to only confirm future Fed governors who are perceived to be independent of the president.
The president has been trying to bend the Fed to his will for months. Trump has mostly focused on Jay Powell, publicly pressuring the Fed chairman to cut interest rates. That pressure has taken the form of direct statements, childish nicknames, public musing about firing the chairman, and an attack on the cost of renovating the Fed’s headquarters.
Last night, Trump stepped up his campaign by issuing a letter firing Cook. The president claims that Cook made false statements on mortgage agreements that led to her losing his trust and that of the American people. But it is evident that a large part of Trump’s motivation is to stack the Federal Reserve Board with governors who agree with him that interest rates should be lower.
President Trump’s willingness to threaten government officials with criminal prosecution as a way to resolve policy disagreements is dangerous. It is an abuse of the justice system and of the powers of his office. It weakens the rule of law. It will discourage men and women of integrity and competence from accepting government appointments. In all these ways, it erodes the foundations of prosperity.
Moreover, Trump’s actions will likely be self-defeating. The president wants lower long-term interest rates, but his clear hostility toward the central bank’s independence from politics will put upward pressure on long rates.
Eroding central bank independence will make investors, businesses, and households less confident that the Fed will be able to keep inflation low and stable because they will expect that the president will be able to bully the Fed into keeping interest rates lower than is merited, juicing demand and creating inflationary pressure. Higher expected future inflation will put upward pressure on long rates. In addition, the erosion of central bank independence and the willingness of the president to criminalize policy disagreements will increase the perceived risk of holding U.S. Treasury debt. That too will push up long-term interest rates.
At the time of this writing, financial markets are taking this episode in stride, and longer-term interest rates have not spiked. But the president and his supporters should take little comfort from this.
It may be that the president can succeed at removing a Fed governor without causing a sudden and sharp spike in long rates. Even so, this will be one more crack in the dam. The more Trump erodes Fed independence and criminalizes policy disagreements, the more likely it is that a day of reckoning in the bond market will come.
Fed independence won’t end in a day. But the erosion of independence will mean that inflation and interest rates will be higher than they otherwise would be, that businesses will invest less than they otherwise would, and that living standards will increase slower than they otherwise would. It means that, when the next crisis hits — a war, a pandemic, a natural disaster, a financial crisis — investors will be less confident in the ability of the Fed to meet the challenge. There will be more panic than there otherwise would be, and the damage from the crisis will be greater.
The Senate needs to be watching all this very carefully. It is reasonable for senators to grant the president wide latitude on cabinet appointments. But the upper chamber’s advice-and-consent role should be exercised much more aggressively when it comes to the Fed — particularly now that Trump has so aggressively attacked Fed independence.
Currently, there is one vacancy at the Fed. Chairman Powell’s term ends next May, and he will need to be replaced. And if the courts do not prevent Cook’s removal — or if she chooses to resign — then the Senate will have a third nominee to scrutinize. That’s potentially three of the seven Fed governors.
There is a lot about Cook’s situation that we don’t know. Did she intend to make false statements on her mortgage forms? At this writing, she has not denied the allegations Trump has made against her.
Will she be charged with a crime? Of course, support for the rule of law means that, if Cook is charged and found guilty, she should face the required consequences. A person convicted of a financial crime would be an awkward fit for a Fed governor given the institution’s role in financial regulation, supervision, and markets. Would she resign if convicted? Even if she is found guilty, can the president fire a Fed governor for mortgage fraud that occurred before her term began?
These questions serve to reinforce the crucial role the Senate will play in maintaining Fed independence. Whether Cook stays or goes, the Senate has to ensure that in the future it confirms only Fed governors who are perceived to be independent of partisan politics and of the president.
Focus on the forest and not the trees: Trump is hostile to the Fed’s independence from politics. He wants to bend the central bank to his will. He is willing to threaten officials with criminal prosecution to get his way. We are in dangerous territory. If this continues, the American people will be less prosperous — and less free.