Leader issues warning to Trump regarding Federal Reserve's autonomy
In the world of economics, the Federal Reserve's independence has long been hailed as a cornerstone of stability for the US and global economy. However, recent events have raised questions about this independence, with President Donald Trump's attempts to exert influence on the Fed's monetary policy decisions.
In a move that could mark a historic first, President Trump has requested federal courts to allow the immediate removal of Federal Reserve Governor Lisa Cook. This request comes after Trump ally Bill Pulte filed criminal referrals alleging mortgage fraud by Cook before she joined the Fed. If successful, Trump's removal of Cook would allow him to appoint a replacement who could favor his stance on cutting interest rates.
The independence of the Federal Reserve has been credited as a pivotal safeguard for the US economy and its role in the global economy. European Central Bank President Christine Lagarde has warned that undue interference in the Federal Reserve's operations by President Trump could pose a serious economic risk to the US and the rest of the world. Lagarde stated that if US monetary policy were no longer independent and instead dependent on the dictates of this or that person, the effect on the balance of the American economy could be very worrying.
The novelty of the situation could result in the case reaching the Supreme Court. It's unclear whether federal courts will agree that a criminal referral meets the standard needed to remove a Fed governor "for cause."
Meanwhile, the Fed's monetary policy decisions have been influenced by other factors. The Fed has not cut interest rates at any of its meetings this year due to uncertainty over the impact of Trump's tariffs. However, Fed Chair Jerome Powell signaled that the changing balance of risks to the Fed's dual mandate could open the door to a rate cut. The CME FedWatch tool shows an 89.7% probability of a 25-basis-point cut in the September meeting, with a 10.3% chance of rates staying at their current target range.
The consumer price index (CPI) and the personal consumption expenditures (PCE) index have remained above the Fed's 2% target rate throughout this year. In July, headline PCE was up 2.6% from a year ago, while core PCE, which excludes volatile food and energy prices, ticked higher to 2.9%. In July's CPI data, headline inflation was up 2.7% year-over-year while core CPI was up 3.1% from last year.
These inflation figures, along with the August CPI print and this week's August jobs report, will help inform Fed policymakers ahead of their next meeting and interest rate decision on September 17. A weak July jobs report raised concerns about a deterioration in the labor market.
As the Fed prepares for its September meeting, the market is pricing in a 25-basis-point cut to the Fed's benchmark federal funds rate. However, the outcome remains uncertain, with the Fed's independence and political influence at the forefront of discussions.
Trump has repeatedly threatened to fire Jerome Powell, the current Fed Chair, for not cutting the Fed's benchmark federal funds rate. Trump's effort to remove Cook is the first time in US history that the president has attempted to remove a sitting Fed governor. The outcome of these events could have far-reaching implications for the US and global economy.
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