According to Cook, her axing is solely about trying to “effectuate her prompt removal and vacate a seat for president Trump to fill and forward his agenda to undermine the independence of the Federal Reserve”.
Trump has effectively confirmed Cook’s allegation.
“We’ll have a majority very shortly, so that’ll be great,” he said this week.
So it’s not beyond the realms of possibility that when the Fed meets on September 16-17, Cook – the first black woman appointed to the institution – could be greeted at the steps of the building by the National Guard to prevent her attendance.
What Cook represents – independent monetary policy – is what is so concerning about Trump’s continuing war.
Trump, who maintains the economy is “booming”, wants the Fed to cut interest rates. The Fed, which has its key lending rate at 4.25-4.5 per cent, is concerned about inflation (it is at 2.7 per cent while the Fed’s target is 2 per cent) and also about the inflationary impact of Trump’s tariff policies.
For more than a generation, central banks have been given independence from the political class to set interest rates at an appropriate level with the aim of keeping inflation in check.
Donald Trump – treating institutions liked the Federal Reserve like a golf course acquisition.Credit: Getty
Trump seems to be treating the Fed more like a possible golf course acquisition. Just something else to control and laud over everyone else.
But it comes with tremendous risk.
Two months ago, University of Maryland economist Thomas Drechsel released research into the economic fallout from the interactions of American presidents with the Federal Reserve, covering the period 1933 and 2016.
Federal Reserve chairman Jerome Powell with fellow central bank governor Lisa Cook in June.Credit: AP
He found that political pressure to cut interest rates “increases the price level strongly and persistently” and “does not lead to positive effects on real economic activity”.
The most egregious example of the president heavying the Fed came in the 1970s when Richard Nixon put the greasers on then Federal Reserve chairman Arthur Burns (appointed by Nixon).
According to Drechsel, an increase in presidential pressure on the Fed half as much as Nixon imposed on Burns would lift prices by 7 per cent.
Monash University economist Zac Gross said what is playing out in the US is dangerous for American consumers and businesses, who could face much higher inflation.
Loading
“If it’s just one person with an illegal sacking then there are other protections in place. But it’s also one more step towards a very big risk that leads to epic levels of inflation, far higher than we saw during the pandemic,” he said.
For those who may have forgotten, American inflation peaked at 9 per cent in 2022 (in Australia, it reached 7.8 per cent). It was one reason why Joe Biden’s presidency struggled and weighed on Kamala Harris’ campaign to defeat Trump.
Australian economist Justin Wolfers, based at the University of Michigan and who knows Cook, said his worry was not just the attack on one Fed governor but the economic path.
He said by trying to bring interest rates down far below what any economist believes is reasonable, Trump’s endgame is becoming clear.
“If he succeeds, the next chapter will involve the world learning more about ‘fiscal dominance’ which is a fancy word for artificially keeping rates low to keep interest payments on government debt low,” he told this masthead.
“My guess is that’s the end goal. It’s also a recipe for inflation, and possibly hyperinflation.
“This is a dangerous road. And every day one feels a little less confident that Trump will heed the warnings of Wall Street not to go this far.”
Westpac chief economist and former RBA assistant governor, Luci Ellis, said at this stage it appeared financial markets were shrugging off Trump’s social media sacking of Cook, although there are signs of disquiet.
The spread between interest rates on 30-year and 10-year American government bonds are spreading, normally associated with concern about the economy. In this case, there’s also the added worry about American government debt, which is at a record $US37.3 trillion and growing.
Loading
Ellis noted the issues around Cook and the apparent sacking of the director of the Centers for Disease Control and Prevention, Susan Monarez, were evidence of a broader problem with the American political system.
“The independence of Fed policymaking is key to the good functioning of global financial markets,” she said.
“But it may be that there is more at stake in a successful resistance of Trump’s attempts to fire Cook and Monarez than the position of the central bank.”