Trump Moves to Oust Fed Governor Cook — Markets Flash Warning

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President Donald Trump’s announcement that he has removed Federal Reserve Governor Lisa Cook has rattled financial markets, raising urgent questions about the independence of the central bank and the president’s authority to take such a step. Equity markets are trading with modest pressure in early Tuesday dealings, but the bigger reaction is coming from the fixed income and currency markets, where investors are recalibrating their assumptions about the Fed’s future path. The move could prove counterproductive for Trump, as the market reaction suggests long-term borrowing costs may actually rise, even if investors continue to anticipate a September rate cut at the short end of the curve.

Trump’s announcement came late Monday night through a letter posted on Truth Social, in which he said he had “sufficient cause” to remove Cook. The allegations stem from claims made by Federal Housing Finance Agency Director Bill Pulte, who accused Cook of making false statements on mortgage applications and referred the matter to Attorney General Pam Bondi. The Department of Justice is reviewing the case, but no charges have been filed. Cook has flatly rejected the allegations, saying there is “no cause under the law” for her removal and that the president lacks the authority to fire her. She has vowed not to resign and retained lawyer Abbe Lowell, who called Trump’s demands “illegal” and without basis. The clash sets up a legal battle that could define the boundaries of presidential power over an institution designed to operate independently.

The stakes are high. Trump has repeatedly called for lower interest rates, citing the need to boost economic growth, ease the burden of tariffs on households, and reduce the cost of servicing the ballooning federal debt. He has castigated Fed Chair Jerome Powell for what he sees as a timid approach to rate cuts. With Cook’s removal and his nomination of close adviser Stephen Miran to replace Adriana Kugler, Trump could potentially shift the balance of power within the seven-member board toward officials more aligned with his agenda. In theory, this would allow the president to exert greater influence over policy decisions, though reserve-bank presidents still cast crucial votes alongside governors. Still, the attempt to expand his control has alarmed market participants and legal scholars. As Peter Conti-Brown of the University of Pennsylvania warned, “If we allow this to become the norm, then this is the end of Federal Reserve independence as we know it.”

Fixed income markets delivered a swift verdict on the news. Long-term Treasury yields rose notably, with the 10-year yield climbing nearly 3 basis points to 4.30% and the 30-year adding close to 5 basis points to 4.94%. This steepening of the curve signals market concerns that undermining the Fed’s independence could ultimately fuel inflationary risks, requiring higher long-term borrowing costs. Higher yields at the long end also translate into higher rates for mortgages and other consumer and business loans, undercutting the affordability gains Trump has said he wants to achieve. By contrast, the short end of the curve is slipping lower as investors continue to price in a September rate cut—markets currently see about 21 basis points of easing at the September 17 meeting and more than half a percentage point by year-end. The result is a curious divergence: the market still expects Powell to cut in the near term but sees Trump’s actions leading to a risk premium in long-term rates.

The dollar has also come under pressure. The DXY index, which tracks the greenback against a basket of major peers, fell about 0.2% to 98.27 in early trade after initially plunging Monday night when the news broke. The modest reaction so far reflects uncertainty over whether Trump’s dismissal of Cook will survive legal scrutiny, but analysts warn the longer-term implications could be more severe. MUFG’s Lee Hardman noted that while the dollar selloff has been contained, “this marks a significant step up in President Trump’s attack on the Fed’s independence, and this could eventually lead to a bigger dollar selloff.” Commerzbank’s Antje Praefcke echoed that sentiment, arguing that “times will remain difficult and volatile for the dollar as Powell might struggle to navigate between appropriate monetary policy and political demands.” The currency reaction underscores the possibility of renewed “sell America” flows if investors lose confidence in the Fed’s independence.

The timing of the clash could hardly be more delicate. Fed Chair Powell signaled just last week that the central bank was edging closer to its first rate cut of the year. Markets are awaiting the August jobs report next week and fresh inflation data the following week to determine whether the Fed will deliver. Trump’s announcement threatens to complicate that calculus, as it increases political pressure on Powell even as data might justify easing. Meanwhile, candidates for Powell’s job, which comes up in May, are already maneuvering for Trump’s support, raising further questions about the politicization of the Fed.

Legal scholars argue the courts will ultimately determine whether Trump has the authority to remove a Fed governor mid-term. Historically, presidents have only influenced the central bank through appointments; firing a sitting governor would break precedent. A recent Supreme Court ruling suggested presidents may have some latitude to remove governors “for cause,” but what qualifies as sufficient cause remains untested. As UBS’s Paul Donovan observed, “If the dismissal survives the courts, the Senate must confirm any successor. Fed presidents still have policy votes. Faith in these checks may limit the negative market reaction.”

For now, equities are holding up better than Treasuries, with futures modestly lower—S&P down 0.15%, Dow off 0.18%, Nasdaq lower by 0.16%. Investors appear to be betting that institutional guardrails will prevent a wholesale political takeover of the Fed. But the message from the bond and currency markets is clear: the president’s attempt to fire Lisa Cook has already raised the cost of long-term borrowing and added uncertainty to the dollar’s outlook. The coming weeks, with pivotal jobs and inflation data, will determine whether the Fed can proceed with its policy plans—or whether Trump’s intervention becomes a lasting drag on market confidence.