The risk of firing a central bank governor

0:28Good morning from the Financial Times.

0:33You have heard us talk a lot about the independence of the Federal Reserve lately. Donald Trump has been threatening to fire Jay Powell because the Fed chair has refused to lower interest rates this year. But now Fed independence has hit its biggest challenge yet. Trump said he was firing Fed Governor Lisa Cook late Monday night, and in response, long-term U.S. Treasuries sold off. Here with me to discuss what this means for the central bank, markets, and the U.S. economy is the FT's Claire Jones. Hey, Claire. Hi, Mark. So, Claire, with the potential firing of Lisa Cook, our colleague Chris Giles wrote, quote, There is every reason to fear for the survival of a key pillar of U.S.

1:15and global economic stability. Those are really intense words. What does this whole situation tell you about the precariousness around central bank independence right now? I think it all depends on whether or not Lisa Cook wins this case. Now, the president on Monday night, rather unexpectedly, said that he was firing Lisa Cook with immediate effect. By the end of the night, Cook and a lawyer had both responded to say that she would not resign and that they were going to challenge the case against Trump. The reason why Trump thinks he's got a case against Lisa Cook is that one of his allies and the director of the Federal Housing Finance Agency, Bill Pulte, who's been a very, very, very big critic of the Fed, has accused Cook of mortgage fraud.

2:10While the DOJ is taking up the case and investigating it, there's still no sense about how that investigation will conclude. Cook has denied any wrongdoing and has said she'll answer questions on the transactions at a point in the future. Now, we should say the Fed has come out and said it will abide by any court decision on Cook. Claire, I want to talk a little bit about the market response to this. There was a sell-off in long-term treasuries. Yields went up on Tuesday. What were investors so nervous about? I think it tells you that markets don't see what's happened to Lisa Cook as an isolated event.

2:46It's part of a multi-pronged attack against the Fed. We've had posts on Truth Social calling for lower interest rates. We've had Trump and his allies attacking the Federal Reserve's renovation. And we now have them attacking directly a member of the Fed's board. I think the sense that investors have is that if Trump is successful in undermining that independence and their credibility, then the U.S. will be less effective at controlling inflation. And what that means is it's going to cost the U.S. government more to borrow. Okay, so let's go back a little bit, Claire. Let's say Trump is legally allowed to fire Cook.

3:26Why would this be such a big deal? I mean, isn't Cook one of several members of the Federal Open Market Committee? There's 12 members on that Federal Open Market Committee who have a vote on interest rates, of which Cook is one. However, she's also part of the much smaller Federal Reserve Board that constitutes seven members. And so we already have two members of that board that are, I wouldn't say allies of Trump, but, you know, they were appointed by Trump in their first term. And we also have a Trump nominee who's going to take another seat on the board. And then if Lisa Cook does depart, then that gives Trump the chance to nominate another ally to fill a seat.

4:14So we're potentially in a situation there where Trump has a majority of four on this seven strong board. Now that really, really matters for the Federal Reserve's governance. And that's a big deal because this board chooses regional Fed presidents who are some of the people who vote on interest rates. Claire, I want to go back to the question of legality. Can Trump actually fire Cook? Because he seems to think so. We don't know. A Fed governor has never been fired. and the legal argument for doing so, that there was four cause and they'd committed gross malfeasance. We don't really have even a sense of what gross malfeasance constitutes and whether or not it would apply in this case.

5:03So there are an awful lot of unknowns here. It will most probably end up in the Supreme Court. So there's a very difficult period ahead here for the US's highest court, I think. Claire Jones is the FT's U.S. economics editor. Thanks so much, Claire. Thanks, Mark.

5:26We now have more details on what U.S. security guarantees might look like in a post-war Ukraine. Senior American officials say that after the war ends, the U.S. is ready to provide intelligence assets and battlefield oversight to any Western security blanket, and it would be prepared to take part in a European-led air defense shield for Ukraine. This is all according to European and Ukrainian officials. The offer is contingent, though, on European countries deploying tens of thousands of troops to Ukraine. The proposal represents a significant shift in the Trump administration's stance on the war.

6:02Just earlier this year, the White House ruled out any U.S. participation in protecting a post-conflict Ukraine.

6:14French bonds and stocks suffered a major hit yesterday. Borrowing costs jumped to their highest level since March, and stocks sold off for a second straight day. Investors are nervous about a possible government collapse as soon as next month, and it's all over a fight about French Prime Minister Francois Beirut's budget. Here to explain is the FT's Leila Abood. Hey, Leila. Hey. So tell me about this potential government collapse. What signs do we have that it could be imminent? Well, the prime minister on Monday surprised everyone by asking parliament to vote on September 8th to back him, basically a confidence motion.

6:54And it's over his 44 billion euro fiscal package to try and start to repair France's quite degraded public finances. It's highly unpopular, as one can expect from a package that includes tax rises and spending cuts. And everyone knew Beirut was going to have trouble passing this because his government doesn't have a majority in parliament. But he's basically taken the initiative to put this vote on the table right away instead of waiting for the opposition, potentially just triggering his own fall much more quickly than expected. Okay, so what are some of the things in Beirut's plan? So it's a mix of tax rises and spending cuts.

7:32He wants to freeze all government spending outside of defense for a year, which obviously mechanically generates billions in savings. They also want to curb some pension spending, increase the amount that French people pay for medicine, reduce sick leave, tighten unemployment benefits, stuff like that. Sort of a broad effort to cut spending. And there will be tax rises including in it. So, you know, it's not popular stuff. I understand that it's not popular, but if it's between a budget they don't like and the government collapsing, why won't other parties back it? So the strongest blocks in parliament are actually the far left and the far right.

8:13So they're just like, the far left is congenitally opposed to any reduction in state spending. The far right here, led by Marine Le Pen, is not economically conservative in the sense you would think of that in the UK or American context. She has this sort of much more populist view of the economy, supports a pretty big role for the state, and is against something like pensions reform or cutting public spending on health care. She's against all of that because she has positioned the party as sort of the advocate for the working classes in France. So it sounds like things aren't looking so good for Beirut.

8:48If his government does collapse, what does that mean for the French economy? It's not great. The growth here has been pretty stagnant lately. Unemployment is ticking up. So the French economy is not in a great place as a starting point. And we've already seen, as you said before, the markets, especially the bond market, really react negatively to this latest bout of uncertainty. Like as ever, even as in America, when Trump was doing all these tax cuts, etc., you have to watch the bond market. And that's what will be the real barometer of whether this political crisis turns into something that could have much more severe effects on the economy.

9:27We're not there yet. So I don't want to sort of scare everyone. Leila Abood is the FT's Paris Bureau Chief. Thanks for not scaring us, Leila. Always trying to help. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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