How Trump’s Push To Remake The Fed Could Backfire On Your Wallet

It started with Federal Reserve Chair Jerome Powell. When the Fed refused to cut interest rates, President Donald Trump openly discussed whether he should remove the chief central banker. When it looked unlikely that he could fire Powell based on policy disagreements, Trump latched onto the Fed’s $2.5 billion headquarters renovation as a sign of fraud.

Now, Trump has turned his attention to one of the Fed’s seven governors: Lisa Cook. He announced in a Monday statement on Truth Social that he was relieving the Fed official from her position. The move would be historic, with no president ever attempting to fire a Fed governor in the institution’s 111-year history. The news came days after William Pulte, the director of the Federal Housing Finance Agency, accused Cook of falsifying records to get a more favorable mortgage rate in 2021, before she joined the Fed.

Cook — who was appointed to the Fed’s board in 2022 by President Joe Biden — has not been charged or convicted. The Fed governor filed a lawsuit in a federal district court on Thursday, describing Trump’s attempt to remove her as “unprecedented and illegal” and a violation of her right to due process. In a statement released through her attorney, Cook said she would not resign and would continue to carry out her duties. A Fed spokesperson declined to comment on whether Cook will still participate in the Fed’s next rate-setting meeting in September. 

Nevertheless, Trump appeared to already be looking ahead to her departure, telling reporters on Tuesday that he’ll “have a majority very shortly” and rates will fall. Days before officially attempting to remove Cook from her position, the chief executive lambasted Powell again for not making a “major rate cut.” Cook also voted to leave interest rates alone at the Fed’s July meeting, and in her most recent public remarks on her economic outlook, she remarked on the twin risks of higher inflation and unemployment from tariffs. 

“It’s pretty clear from that basis that this is pre-textual,” said Robert Hockett, a law professor at Cornell University who specializes in monetary policy and financial regulation. “This is not about mortgage fraud. This is entirely about seizing control of the Fed. He failed with Powell. Now, he’s moved on to the next one.”

Cook’s role is lower-profile than Powell’s, but law experts and former Fed officials tell Bankrate that firing her could carry the same dangers: weakening the Fed’s independence and ultimately costing consumers by raising interest rates — and prices. 

Research shows that countries with politicized central banks have higher inflation rates. One estimate by the National Bureau of Economic Research shows that exerting political pressure on the Fed for six months — even at just half the intensity of President Richard Nixon in the early 1970s — pushes U.S. prices more than 8 percent higher after a decade.

Political interference could lead to higher interest rates. Yields on government debt, particularly longer-term bonds, factor in investors’ expectations about inflation. If markets start doubting that the Fed is serious about keeping price pressures tame, they might demand a higher premium as compensation for the risk that their investment may lose value.

Many Americans also do not like the idea of politics wading into the banking system. Half (50 percent) of adults say that giving the president more control over the U.S. central bank could harm their finances, according to Bankrate’s recent Consumer Sentiment Survey. Higher inflation means the dollars in their wallets won’t go as far as they used to. Higher interest rates on government bonds could make borrowing costs more expensive on everything from a car to a mortgage.

Trump is ramping up his attacks on the precipice of what could be the Fed’s first interest rate cut in a year. Powell signaled in an August address at the Fed’s annual Jackson Hole monetary policy symposium that he’d be open to lowering borrowing costs this month.

“Fed credibility is one of its most important policy tools,” said Lauren Goodwin, economist and chief market strategist at New York Life Investments. “When markets begin to believe the central bank is responding to politics rather than data, interest rate expectations can behave in unexpected — and often counterproductive — ways. Market interest rates are likely to go higher, even if policy rates go lower.”

Fed independence is at stake if Trump fires Lisa Cook, experts say

Clashes between presidents and Fed officials are not new, but Cook’s removal marks a watershed moment: It’s the first time a president has tried to fire a sitting Fed governor.

Under Section 10 of the Federal Reserve Act, Fed governors can be removed before their term is up “for cause.” Lawyers have looked to a Supreme Court case from 1935 that originated when President Franklin D. Roosevelt attempted to fire the chair of the Federal Trade Commission (FTC). That ruling said “for cause” entails: “inefficiency, neglect of duty or malfeasance in office.”

Trump argues Cook’s conduct met that threshold, citing allegations from Pulte that she claimed two primary residences in 2021 to obtain a lower mortgage rate. Her legal team described the allegations as “unsubstantiated,” according to her lawsuit. 

There has been little information released publicly about Cook’s mortgages. Her latest public filings only reveal that she has three mortgages: one on an investment property and two on personal residences. Trump would have to prove that Cook filled out her applications incorrectly with the intent of deceiving her lender for her own benefit, a high legal bar, Hockett said.

“You’d have to show some real evidence that it happened, you can’t just say it, and that particular charge would have to have some relation to her capacity to be a Fed board governor,” Hockett said.

But if Trump is successful, “the risk is that the Fed loses its independence,” he adds. “We might think of this essentially as a recognition of a greater degree of formal authority or formal power that [Trump] wasn’t previously recognized as having.”

If a case like this proceeds to the Supreme Court, justices might not just review the justification for Cook’s dismissal but the entire contours of “for-cause” protections, legal scholars say.

“Can Congress write statutes that give for-cause protection? Or is it running up against the authority of the president? That is going to be litigated, too,” said Sarah Binder, a political science professor at George Washington University who authored a book on Fed independence in 2017. “The Fed’s independence depends on broad political support to back it up. It’s not independence if it’s conditional or dependent on somebody else.”

If Cook is fired, Trump would get to pick a fourth member of the Fed’s seven-member board. Trump previously installed Fed Gov. Christopher Waller and Michelle Bowman, who’s now the vice chair for supervision. He’s also nominated Stephen Miran, chair of the White House Council of Economic Advisers, to fill Fed Gov. Adriana Kugler’s seat after she stepped down last month. Powell, meanwhile, was Trump’s pick for Fed chair in 2018, but he was originally elevated by President Barack Obama. 

Governors are appointed by the president and approved by the Senate to serve staggered, 14-year terms, a set-up intended to avoid letting a single president stack the board. They’re not the only officials who vote on interest rates, but their decisions carry more weight because they get to vote at every Fed meeting. 

The Fed governors who Trump appoints will also have the power to veto or approve the appointments of the 12 regional Fed bank presidents — officials who traditionally operate outside the White House’s reach. Fed presidents serve five-year terms, with the next review scheduled for February 2026. Five of them a year also get a vote on interest rates at Federal Open Market Committee (FOMC) meetings.

“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,” according to a statement from a Fed spokesperson, while adding that the Fed will abide by any court decision. 

Even if Trump’s attempts are unsuccessful, experts fear that Fed officials may feel less inclined about expressing their views if they’re at odds with the president’s.

“If he can make life unpleasant enough and be relentless about it, Fed board members might be less independent-minded or become more likely to kowtow because they don’t want the aggravation,” Hockett said. “That wouldn’t be really dependent on winning the case in court.”

Economists — and Americans — see the risks of political interference

If the Fed’s credibility erodes, the cost shows up not just in Washington, but in household budgets.

The public saw this play out in the ’70s: When officials acquiesced to pressure from Nixon to keep rates low, they fueled the painfully high inflation — and interest rate hikes intended to control it — that followed in the ’80s.

Trump’s pressure is already impacting markets, according to Ian Lyngen, CFA, head of U.S. rate strategy at BMO. One example: Yields on the shorter-term 2-year Treasury have fallen as longer-dated 10-year Treasury yields have climbed. Since Trump took office in January, that “yield curve” has steepened by 37 basis points. 

Short-term yields closely track what investors expect the Fed to do in the near future, while longer-term yields reflect expectations about inflation, the economy and interest rates over time. When they grow further apart, it’s a sign that investors see rates and inflation staying higher for longer.

“The front-end of the curve continues to be supported by building rate cut expectations, whereas the Fed independence drama has warranted a more cautious approach to the long end of the Treasury market,” Lyngen said. “Even if one doesn’t think the attack on Cook is political, it’s clear what Trump is aiming to get out of the opportunity to fill another vacant board seat.”

Those factors have helped keep the 30-year fixed-rate mortgage higher than it was when the Fed cut rates for the first time back in September, according to Bankrate data. The 10-year Treasury yield is often considered a risk-free rate, meaning other shorter-term borrowing costs could edge higher along with it.

Long-term interest rates depend more on what markets think, not the Fed. Fed independence adds to other inflation-related worries, including tariffs and Trump’s tax cuts. A ballooning budget deficit, meanwhile, means the government is bound to keep issuing a steady stream of Treasurys.

What Trump’s attempt to gain power over the Fed could mean for you

To some of the nation’s top Fed watchers, what happens to Cook’s seat isn’t the only question. It’s also whether political attacks change how the public sees the institution. That perception, economists say, is as powerful as any rate move, given just how much expectations for inflation and interest rates can move markets and prices.

Esther George served as the president of the Kansas City Fed from 2011 to January 2023, attending more than 40 FOMC meetings during her tenure. Politics never impacted the committee’s decisions, she said, and never came up around the boardroom. Trump also isn’t the first president to pressure the Fed, but he might be the loudest, she added.

The way Americans view the Fed also appears to come down to their politics. Almost half (46 percent) of Republicans said giving the president more control over the Fed would improve their finances, compared with just 4 percent of Democrats, Bankrate’s survey also found.

“If you’re nicknamed ‘Too Late Jerome,’ do you want it on your record that you missed the turning point?” said Vincent Reinhart, chief economist for BNY Mellon Asset Management, who spent more than two decades at the Fed. “The perception problem cuts both ways: if Powell cuts, does it look like caving to Trump? If he holds steady, does he risk appearing behind the curve?”

Cook’s potential absence from the Fed’s September meeting might not keep the central bank from cutting borrowing costs, given that Powell appears on board and two other Fed governors dissented against the Fed’s decision to leave rates alone in July, according to Jaret Seiberg, managing director for TD Cowen’s Washington research group.

What’s more certain is that the political fight between the Fed and the White House is only beginning. If you’re wondering how to protect yourself in the long run, the first step is to not panic, experts say. The best defense for households from inflation and higher interest rates are: 

“Presidents try to juice the economy temporarily to make it look like there’s a high-growth rate and a time of prosperity, so the president can be popular as having presided over a prosperous economy,” Hockett said. “Usually, they’re out of office by the time the bad inflation kicks in.”