The Legal and Economic Risks of Trump’s Attempt to Remove Fed Governor Lisa Cook

The legal and economic fallout from President Donald Trump’s attempt to remove Federal Reserve Governor Lisa Cook has ignited a critical debate about the independence of central banks and the stability of financial markets. At the heart of the dispute lies a constitutional and statutory question: Can a president remove a Fed governor without demonstrating “cause,” a term ambiguously defined under the Federal Reserve Act? Cook’s lawsuit argues that Trump’s allegations of mortgage fraud—centered on properties she owned before joining the Fed—lack the legal weight to justify her removal, which could set a dangerous precedent for presidential overreach [1].

Legal Risks and the Erosion of Fed Independence

The Federal Reserve Act mandates that governors serve 14-year terms and may only be removed “for cause,” a standard interpreted to include serious misconduct like inefficiency or malfeasance [2]. Trump’s referral letter from the Federal Housing Finance Agency, which accused Cook of misrepresenting her primary residence on mortgage applications, has been widely criticized as a politically motivated pretext [3]. Legal scholars warn that if the courts uphold Trump’s action, it could empower future presidents to dismiss Fed officials over policy disagreements, undermining the institution’s independence [4]. This risk is amplified by the Supreme Court’s recent ruling on the National Labor Relations Board, which highlighted the need for nuanced distinctions in removal protections [1].

Economic Implications: Inflation, the Dollar, and Market Volatility

The Fed’s independence is a cornerstone of global financial stability. When central banks are perceived as politically influenced, inflation expectations rise, and investors lose confidence in monetary policy. Former Fed Chair Janet Yellen has warned that Trump’s actions could lead to “higher inflation, volatile growth, and a weakened dollar,” echoing historical patterns where political interference destabilized economies [5]. For example, Richard Nixon’s pressure on the Fed in the 1970s contributed to stagflation, while Turkey’s central bank politicization under Recep Tayyip Erdoğan led to a 75% lira depreciation [6].

Market reactions to Trump’s move have already materialized. Gold prices surged 25% in 2025 to $3,300 per ounce, with J.P. Morgan forecasting a potential climb to $4,000 by mid-2026, driven by inflation hedging and dollar weakness [7]. The U.S. Dollar Index, at 97.74 in August 2025, has weakened 10.7% year-to-date, reflecting diminished investor trust in the currency’s stability [8]. These trends underscore how perceived threats to the Fed’s autonomy can trigger asset reallocation toward inflation-protected holdings and non-dollar assets.

Historical Precedents and the Path Forward

Central bank independence correlates strongly with low inflation. Countries like Switzerland and Sweden, with robust institutional safeguards, have maintained price stability, while politically controlled banks in Argentina and Venezuela have faced hyperinflation [9]. The Fed’s credibility, built over decades, is now at risk. If Trump succeeds in replacing Cook with a dovish ally, it could lead to aggressive rate cuts that prioritize short-term economic growth over long-term stability, exacerbating inflationary pressures [10].

The resolution of Cook’s lawsuit will likely determine the Fed’s future. A ruling in her favor would reinforce the legal boundaries of presidential power and preserve the Fed’s role as an apolitical institution. Conversely, a loss could embolden future administrations to weaponize removal authority, with cascading effects on global markets. Investors must remain vigilant, as the outcome will shape not only U.S. monetary policy but also the broader architecture of central bank independence in an era of rising geopolitical and economic uncertainty.

Source:
[1] Fed Governor Cook sues Trump over his attempt to fire her [https://www.reuters.com/legal/government/fed-governor-cook-sues-trump-over-his-attempt-fire-her-2025-08-28/]
[2] What Supreme Court Said About Presidents Firing Federal Reserve Board Members [https://www.newsweek.com/donald-trump-supreme-court-fed-firing-lisa-cook-2119497]
[3] Letter to Federal Reserve Governor Lisa Cook Notifying Her of [https://www.presidency.ucsb.edu/documents/letter-federal-reserve-governor-lisa-cook-notifying-her-her-dismissal-from-office]
[4] Trump's "unprecedented" firing of Fed Governor Lisa Cook raises untested questions [https://www.cbsnews.com/news/trumps-unprecedented-firing-of-fed-governor-lisa-cook-raises-untested-questions/]
[5] Janet Yellen Warns Of 'Catastrophic' Consequences As Trump Fires Fed's Lisa Cook [https://finance.yahoo.com/news/janet-yellen-warns-catastrophic-consequences-113035438.html]
[6] The Politicalization of the Federal Reserve: Implications for Market Stability [https://www.ainvest.com/news/politicalization-federal-reserve-implications-monetary-policy-market-stability-2508-69/]
[7] A new high? | Gold price predictions from [https://www.jpmorgan.com/insights/global-research/commodities/gold-prices]
[8] Gold's Rate-Cut Rally at a Crossroads [https://www.ainvest.com/news/gold-rate-cut-rally-crossroads-navigating-dollar-strength-pce-volatility-trump-fed-challenge-2508/]
[9] Charting the rise of central bank independence over decades [https://www.weforum.org/stories/2024/07/emerging-markets-central-bank-independence/]
[10] The Implications for Monetary Policy and Markets [https://www.ainvest.com/news/fed-political-vulnerability-impact-monetary-policy-markets-2508/]