Trump's War on the Fed Ignites a Battle for Central Bank Independence

The U.S. dollar weakened against major currencies following President Donald Trump’s announcement that he would immediately remove Federal Reserve Governor Lisa Cook from her position, marking a significant escalation in his ongoing pressure campaign against the central bank. In a letter posted on his social media platform, Truth Social, Trump cited constitutional authority and accused Cook of mortgage fraud, asserting he had “sufficient reason” to justify her removal. The Federal Reserve, however, has not yet responded to the claim, and neither has Cook commented on the matter publicly [1].

Cook’s removal, if upheld, could trigger a broader legal and political struggle between the White House and the Fed. Legal experts have noted that the Fed’s independence, established in 1951, typically requires removal of a governor to be based on “malfeasance or dereliction of duty.” This precedent may protect Cook, especially given the lack of formal charges against her. The Supreme Court previously ruled in May that the Fed is a “uniquely structured, quasi-private entity,” further reinforcing its independence from direct presidential control [3]. If the dispute reaches the courts, it could set a precedent with implications beyond the U.S., as central banks worldwide have long relied on institutional independence to maintain monetary credibility [4].

Trump’s move is part of a larger strategy to reshape the Fed to align with his economic priorities, particularly his calls for rapid interest rate cuts. The Fed’s chair, Jerome Powell, has resisted these pressures, and Trump has frequently criticized him, using derogatory language in public statements. Last week, Powell indicated that a rate cut was likely in September, a position that appears to contradict the administration’s demands. Trump has already appointed several governors, including Stephen Miran, a vocal advocate for reducing the Fed’s independence. With Miran and other Trump appointees, the president is positioning himself to influence the Fed’s governance and potentially tilt its composition in favor of his economic agenda [2].

The market reaction to the news was swift, with the U.S. Dollar Index dropping as investors priced in the likelihood of a more dovish central bank. The euro and yen both strengthened against the greenback, reflecting concerns that political pressure might override the Fed’s traditional economic-focused decision-making. Analysts warned that if the Fed’s independence is compromised, it could undermine global trust in the U.S. dollar as the world’s primary reserve currency and lead to higher bond yields as investors demand additional compensation for risk [2]. The European Central Bank and the Bank of Japan have already expressed concerns about the broader implications of the U.S. central bank’s potential politicization, with ECB policymakers emphasizing the necessity of maintaining independence for price stability [4].

The situation has drawn sharp criticism from lawmakers. Senator Elizabeth Warren, the top Democrat on the Banking Committee, labeled Trump’s actions as an “illegal attempt to fire Lisa Cook” and an “authoritarian power grab.” She urged the courts to overturn the decision, stating it violated the Federal Reserve Act and served as a political distraction from the administration’s economic failures [2]. On the other hand, the Trump administration argues that its actions are within constitutional authority and are necessary to address what it views as corruption within the central bank. The White House has not ruled out further challenges to the Fed’s leadership, including potential efforts to replace Powell when his term as chair expires in May [2].

As the standoff continues, the global financial system remains on edge, with central bankers from around the world watching closely. The U.S. Federal Reserve has long served as a model for central bank independence, and any perceived erosion of its autonomy could prompt similar pressures elsewhere, particularly in countries with less established institutional checks and balances. The potential fallout includes increased inflation volatility and diminished confidence in the stability of global financial markets. The coming months will be critical in determining whether the Fed can maintain its independence or if political influence will begin to reshape its operations [4].

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[1] title1 (https://www.bbc.com/news/articles/cx275n8gx0ro)

[2] title2 (https://fortune.com/2025/08/25/trump-fed-war-lisa-cook-central-bank-independence-powell-supreme-court/)

[3] title3 (https://www.nbcnews.com/politics/white-house/trump-removing-federal-reserve-governor-lisa-cook-rcna227138)

[4] title4 (https://www.reuters.com/business/finance/worlds-central-bankers-fear-being-caught-feds-storm-2025-08-25/)