The Federal Reserve Under Siege

0:05Last night, just after 8 o 'clock in Washington, D.C., President Donald Trump posted a letter on his social media feed. And you click into the image and you read that he has decided to fire Lisa Cook, who is one of the seven members of the Board of Governors at the Federal Reserve. And what did that letter say? Do you have it up? Yeah, it's a letter on White House letterhead dated August 25th. It says, Dear Governor Cook, pursuant to my authority under Article 2 of the Constitution of the United States and the Federal Reserve Act of 1913 as amended, you are hereby removed from your position on the board of governors of the Federal Reserve effective immediately.

0:50That letter is the latest turn in what's been an escalating battle between Trump and America's central bank, the Federal Reserve. The president is considering firing Federal Reserve Chairman Jerome Powell. Trump has again been pushing Fed Chair Jerome Powell to lower interest rates, ramping up that pressure by publicly examining costly renovations the Fed is making. President Trump escalated his attacks on Federal Reserve Chair Jerome Powell. The Fed was created just over 100 years ago. Our colleague Matt Grossman covers economics. And in all those years, a president has never tried to fire the chair of the Federal Reserve or any of its governors.

1:32And it really puts us into uncharted territory. Why does that matter? What's the heart of the issue here? It really raises the question of whether this powerful and absolutely central economic regulator, which is a really unique institution in the United States, is going to remain independent. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, August 26.

2:07Coming up on the show, Trump's unprecedented power play at the Fed.

2:27So who is this person that the president says he's firing? Who is Lisa Cook? Sure. So like many of the officials who serve on the Fed's board of governors and throughout the Fed system, Cook is an academic economist. And she's only served on the Fed board for a few years now. The U.S. economy is still on a firm footing. But uncertainty has notably increased since the beginning of the year. Cook was nominated to the board of the Federal Reserve by then-President Joe Biden in 2022. She's the first Black woman to serve as a Fed governor. Let's back up a little here. What even is a Federal Reserve governor?

3:08As part of the Fed's independence, Congress set up a delicate balance where decisions about interest rates in the country would be made, on the one hand by officials who are scattered across the country. Those are the presidents of the Fed's regional reserve banks. They're in cities like New York, Chicago, San Francisco, Kansas City, and a group of governors who are based in Washington. That group is led by Fed Chair Jerome Powell. The Fed runs the internal plumbing of the U.S. financial system, and most notably, it votes on whether to lower or raise interest rates. In the short term, it's often a great boost to the economy to have low interest rates.

3:52Low interest rates mean that it's cheap to borrow. So if you're a homeowner, it's easier to get a mortgage. And if you're a business looking to make an investment, borrowing the money that you need to do that is going to be cheaper. So it encourages a lot of economic activity. The downside is that over time, an environment like that where there's a lot of spending and the economy's heating up can often coincide with inflation. And real people suffer. They see prices going up at the grocery store. They see more expensive prices for airfares and hotels and education and everything else. And striking a balance between those two is really the Fed's mission.

4:34The ability to make potentially unpopular decisions, like raising rates, is crucial to achieving that mission. Early in the Biden presidency, inflation was a big problem. So the Fed aggressively raised interest rates. Until about a year ago, when inflation had cooled enough for the Fed to start cutting rates. Now, Trump has made it clear that he wants the Fed to cut rates further. We want to see interest rates come down. Our country is booming. He came into office saying, you know, we're going to have a great economic revival. And, you know, I have come in and really cleaned up a lot of the inflation that we saw under the Biden administration.

5:15And in fact, inflation's quite a bit lower, although not all the way back to the Fed's target. And going along with that should be a low interest rate policy that works with my administration and isn't leaning against the economy. So why hasn't Fed Chair Jerome Powell cut rates yet? It's been a really tough call for them this year. The tariffs that President Trump has implemented introduced a lot of anxiety about inflation because they could disrupt supply chains. And Fed officials have been really cautious about reducing interest rates before it's clear how much tariffs are going to revive some of the inflation we saw over the past few years.

6:00The fact that the Fed hasn't cut rates yet has frustrated Trump. He sees high interest rates as a drag on the economy and on his administration's priorities. For months, the president has signaled that he wants to remove Powell as chair. Powell's four-year term as Fed chair is supposed to continue through May of next year. It's been quite a multi-pronged attack from the White House. To start, there's been just an endless stream of criticism about how Powell has managed interest rates. More recently, President Trump has found other reasons to criticize the Fed. In July, he became really interested in a construction project that the Fed is doing at its headquarters in Washington.

6:42And President Trump sort of seized on this project as an example of mismanagement. It's a tough construction job. They're building basements where they didn't exist or expanding them. And a lot of very expensive work. There's no question about it. And that, you know, this was a sign that Jerome Powell, you know, isn't able to manage the institution well, setting aside the policy decisions. In the past few weeks, Trump has sort of moved on from that. Instead, Trump has focused on Lisa Cook. It started last week with a Trump ally who serves as the head of the Federal Housing Finance Agency, a man named Bill Pulte.

7:22Pulte alleged on social media that in 2021, Cook submitted what he called fraudulent information on a pair of mortgage applications. He said that Cook described two different properties in two separate states as her primary residences. The filing could have given her a better mortgage rate. Pulte's post included images of what appear to be Cook's signature, but not any other evidence backing his accusation. So that sort of kicked off this chain of investigations that have ricocheted from Bill Pulte at the FHFA to the Justice Department, where, you know, he says that he referred Cook for a criminal complaint that, you know, has now culminated with Trump saying, You know, we've now seen evidence that, you know, she has committed what he alleges is mortgage fraud and, you know, we're going to dismiss her over that.

8:14Cook says that she believes that the dismissal is unjust and illegal and that she plans to stay in the position and pursue, you know, legal avenues to do that. In a statement, Cook noted that the application was filed four years ago, before she joined the Fed. She has since hired an attorney and says she intends to remain in her job and that Trump has no authority to fire her. A Federal Reserve spokesperson said that Fed governors, quote, may be removed by the president only for cause. The spokesperson added that removal protections are in the interests of the American people and noted that the Fed will abide by any court decision.

8:54If Trump is successful in ousting Lisa Cook, he'll have an opportunity to reshape the Fed and the future of monetary policy. That's next.

9:13Of the seven Fed governors, two of them were appointed by Trump in his first term. Both voted against the committee's decision last month to hold rates steady, arguing for a cut instead. Now, there's potentially room for more Fed governors who could align with Trump. There's already a vacancy when another Biden-appointed governor resigned earlier this month. So he has her seat to fill and he's nominated a close advisor, Stephen Myron, to take that job. And now, depending on how this legal case plays out, he may or may not have another opening to. And if it all goes Trump's way? Well, it would be a really seismic shift in the makeup of the board, especially because in about eight months from now, the president's going to have the chance to pick Jerome Powell's successor as Fed chair, which is a very influential post.

10:05It's likely that Trump is thinking about that Fed chair opening and also who might be the right person to succeed Lisa Cook if the legal removal is successful. All of this puts Powell in an awkward situation at an awkward time. Americans are waiting for the Fed to make a decision next month on interest rates. Just last week, Powell hinted at a possible forthcoming rate cut. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance. Now, with politics looming over every decision he makes... It really puts Powell in a bind because everyone knows he's under this immense pressure from the White House.

10:53And it sort of makes it incumbent upon him to make what he sees as the most rational, independent calls that he can, not because they're the ones the president wants us to make, but because they're in the best interest of the economy.

11:13This kind of speculation about whether the Fed's decision might be influenced by politics, that's the very reason the agency was set up the way it is. It was supposed to avoid even the perception of political pressure. The Fed really insists that it's just calling balls and strikes. It is just taking the data that come out about how labor market's doing, how inflation is doing, and making the best calls that it can. And it's something that Fed Chair Jerome Powell is very careful to say almost any time he steps in front of a microphone, that we are doing this work with the best interests of the American people in mind, thinking about how it affects their day-to-day lives.

11:55And I think that the Fed voters who have backed this wait-and-see approach so far this year would say that they just so far have not been comfortable with the inflation outlook, in part because of the tariffs that we've seen and just the immense uncertainty about how those will play out. You've said that presidents have always wanted to keep interest rates low, and presidents have also had nominating power of Fed governors and Fed chairs. So what is it that Trump's doing that is different? It's a new paradigm for the Fed to make a decision, one that maybe cuts against the president's interests.

12:35And he embarks on a process to say, you know what, I want someone else on the Fed board who's actually going to do what I want. It really degrades the trust that people have in the institution to be above that short-term political frame. And if this is an institution that comes under the sway of the White House, that really has the potential to degrade very quickly.

13:19Alex Leary and Brian Schwartz.

13:24Thanks for listening. See you tomorrow.