ICYMI: Trump Tries to Remove a Fed Governor

0:11This podcast features Lisa Cook.

0:30move by a president. Cook was appointed by former President Joe Biden, and she's the first Black woman to serve in the role. She responded in a statement saying Trump has no authority to remove her and she'll continue her duties. Cook has not been charged with a crime, and her attorney says they will file a lawsuit challenging the firing. So what comes next, and what does this mean for the independence of the central bank? Mike Burr joins us from London after the break. He's the Wall Street editor at The Economist and shares all the latest. Stay with us. We've got a lot to get to.

1:05Mike, welcome back to the program. Great to be here, Jen. So let's start with this allegation of mortgage fraud against Cook. Where is this coming from? So the accusation is, yeah, one of financial impropriety. It's a suggestion that Lisa Cook misrepresented herself in at least one of two mortgage applications in 2021 for different residences. These are in her financial disclosures that officials make. They allege that she has two mortgages requiring the borrower to occupy the property in question for at least a year after the first 60 days in which the loan is extended. Obviously, a person can't do this in two properties at the same time.

1:51The accusation is that she's gotten cheaper funding for these mortgages by representing both as her primary residence. That would typically get you a slightly lower mortgage rate if you're borrowing from a bank. Democratic Senator Elizabeth Warren of Massachusetts said in a statement, quote, it's an authoritarian power grab that blatantly violates the Federal Reserve Act and must be overturned in court. Give us a little more background on the Federal Reserve Act and what power it does and does not give a president. Absolutely. So the Federal Reserve Act is really the core piece of legislation that governs how central banking works in the US.

2:29It was passed in 1913 and it created the entire system of the Federal Reserve. So that's 12 Federal Reserve Bank presidents from different parts of the country, seven governors appointed by the president. Those are very long terms for the governors appointed by the president. They're 14 years, and they're overlapping. And the intention of that is that no one president is meant to have too much influence over who's on the Fed board at any one time. Congress sets the goals for the Fed to follow, but the Fed has operational independence that's allowed to try and meet those goals however it sees best.

3:08It also sets out the fact that the president can only fire governors for cause. Again, this is a core part of keeping it an independent institution. But for cause is not something that's well explained in the legislation. And it's not really something that up until this point has been legally tested. We haven't had presidents try and fire the governors that previous presidents have appointed. So in short, presidents can pick the governors, but they're not really meant to be able to cut them. Otherwise, they'd be able to, you know, fire all the governors as soon as they came in and appoint their own after every election.

3:44That's clearly not the way it's meant to work. But what we're going to see now is a real test of what for cause means and how far the Supreme Court in particular is willing to stretch that definition. Now, Lisa Cook is refusing to step down, writing in a statement, quote, President Trump purported to fire me for cause when no cause exists under the law and he has no authority to do so. So first, Mike, when we're talking about the cause here of Trump's attempt to fire Cook, she hasn't been charged with any crimes, correct? No, absolutely. And that's part of the difficulty here. This is an accusation that comes from the administration.

4:25It's coming from Bill Pult, the head of the Federal Housing Finance Agency. The legal battle is going to be sort of unusual as well. The Fed itself doesn't play a part in this. Lisa Cook is being represented by Abby Lowell. She's a bigwig Washington lawyer who's been representing some of the other people who've been legally targeted by the Trump administration. He's represented Jared Kushner in the past. He's represented Hunter Biden in the past. He's a big deal in the town. But she will do this on her own in a personal capacity. It's not something that the Fed gets directly involved in. And it puts the Fed in this very unusual position in the sense that a decision has to be made as to whether the organization acts as if she's been fired or not, as if the president has the right to do this.

5:17It's a tough spot. What they're doing at the moment, the Fed as an institution, is it's staying out of it, but basically saying it will abide by a court ruling, which is why I say, you know, ultimately this is going to, or something very like it, is going to end up in front of the Supreme Court and it's going to have to be a sort of judicial ruling. And the Fed will wait for that before acting as if Lisa Cook has or has not been fired. And what's your understanding of the status of any investigation into Cook? My understanding is that there is not really an active investigation. This isn't a criminal proceeding.

5:55This is something that has been dug directly by the administration from Cook's financial records. It's not like you might imagine in any other circumstance there would be a sort of criminal investigation that led to this sort of action. This hasn't been the way this has happened. And I think this gets to the fact that the investigation here or the lack of an investigation, the accusation, is impossible to separate from Trump's sort of wider attack on the Federal Reserve and wider undermining of the independence of the Fed. And we should note here that Trump has repeatedly clashed with the Fed, especially Chair Jerome Powell, over interest rates and Powell's reluctance to cut them.

6:39So what is Trump saying he plans to do if Lisa Cook is removed from her seat? Well, Trump says he already has people in mind to appoint to Lisa Cook's seat. He hasn't named who, but he says that. And you're absolutely right. Trump has talked multiple times about sacking Jerome Powell, which, again, he can't do except for cause. There's been a lot of fishing around for something Jerome Powell might have done, which would constitute cause in one way or another. There's been a lot of interest from the Trump administration about the Federal Reserve building's renovation, for example, and speculation that the president might try to use the overrunning cost of the renovation as a supposed cause for getting rid of him.

7:26You know, this is not an isolated incident with Lisa Cook at all. It's a very clear attempt to sort of either bully the existing members of the Federal Reserve Board or install new ones. The president has talked repeatedly about how he thinks interest rates should be much lower. And this is his effort to try and make that happen one way or another. Why is President Trump so intent on trying to get the Fed to lower interest rates and trying to hold more power over the Fed? Well, it's a great question on the first part, and it gets to a sort of complicated issue. Obviously, you know, nobody really likes interest rates being high.

8:05If you're a borrower, if you have a mortgage that might need refinancing soon, you'll know that this is an uncomfortable position to be in. That's Part of why Donald Trump wants interest rates to be lower, this is a fairly consistent position that he's had for a very long time. He complained about it repeatedly in the past. The real difficulty here is that even if Donald Trump got what he wanted with lower interest rates, the sort of destabilizing effect that he's encouraging right now in terms of people questioning the independence of the Federal Reserve really raises long-term interest rates, long-term US government bonds.

8:43And ironically, somewhat ironically here, that's likely to raise rather than to lower mortgage rates because they're very long dated. So it's not going to have the effect that the president wants here. But it's a fairly consistent demand of his. He's pretty much always thought that interest rates should be lower rather than higher. This came up during the first administration. It's a sort of constant push from him, Unlike most presidents, many of which historically have put pressure on Federal Reserve governors to cut interest rates, Donald Trump is doing this in a much more sort of brazen way.

9:19The actual threats to fire people are extremely unusual. historically, even among the presidents who in private put a lot of pressure on the heads of the Federal Reserve to lower interest rates, haven't sort of taken this level of pressure that we're seeing at the moment. Mike, how are the markets responding to the presidents meddling with the central bank? Well, the market response has actually been relatively limited so far. And I think that tells you something interesting. You've seen a little bit of a dip in the dollar, as I say, a little bit of a rise in long-term interest rates, but it's really been quite muted.

9:51I think investors are still trying to determine to what degree this effort to get rid of Lisa Cook constitutes a real crossing of the Rubicon. This is sort of new, completely unbroken territory. Now, I think if the Supreme Court comes to the decision eventually that this firing is for cause and that it's fine and under the Federal Reserve Act this is allowed, then I think investors won't take this as a Rubicon crossing moment of no return in which Federal Reserve independence is permanently undermined. If, on the other hand, the court eventually decides that this is not for courts, that Donald Trump is not allowed to fire Lisa Cook for these reasons, then that's a different question.

10:43And it may lead to a bit more market disruption if the president then continues to try removing Fed governors having been told it's, you know, illegal. So right now, Federal Reserve Governor Cook and President Trump seem to be at a bit of a standoff. What are you watching for next? Absolutely. I mean, we're watching to see whether there are any other actions against Federal Reserve members, especially against Jerome Powell, who's stepping down at the end of next year. We're also listening out for any news on who Donald Trump might appoint as the next head of the Federal Reserve. That decision will be coming up in the next few months.

11:18That's Mike Byrd, The Economist's Wall Street editor. Mike, thanks so much for speaking with us. Thanks for having me. This program comes to you from WAMU, part of American University in Washington, distributed by NPR. I'm Jen White. Thanks for listening, and we'll talk more soon. This is 1A. Thank you.