The dollar weakened and government borrowing costs rose sharply after President Trump said he had taken the unprecedented decision to sack a member of the country’s independent central bank.
Investors sold government bonds and the dollar after the president said he had — “effective immediately” — sacked Lisa Cook, a member of the Federal Reserve’s governing board, over allegations of mortgage fraud.
The fate of Cook, who had said she would not resign, marks an escalation in the president’s attacks on the independent Fed after Trump demanded policymakers carry out immediate and large interest rate cuts to support the economy and job market.
Trump said on Tuesday night that he was ready for a legal battle to oust Cook and would abide by any court ruling.
Jerome Powell, the Federal Reserve chairman, and Cook in June
MARK SCHIEFELBEIN/AP
It was unclear whether Trump had the authority to sack Cook and replace her on the 12-strong Fed rate-setting committee that makes interest rate decisions. Cook is also a member of the seven-strong governing board of the central bank.
Yields on long-term US government bonds, known as 30-year Treasuries, rose by as much as 0.06 percentage points on Tuesday to 4.92 per cent. Longer-dated bonds and the dollar have become a proxy for worries about the state of US fiscal policy. The gap between short and longer-run borrowing costs briefly widened to a three-year high, reflecting fears about the independence of the Fed, which sets monetary policy and oversees financial regulation in the world’s largest economy.
After a mixed start Wall Street equity markets moved into positive territory although gold, seen as a safer haven in turbulent markets, also rose 0.4 per cent to $3,388.60 an ounce, its highest value since August 11. By the close in New York on Tuesday night the S&P 500 was up 0.4 per cent at 6,465.94 and the Nasdaq was 0.4 per cent higher at 21,544.27. The dollar fell by 0.15 per cent against a basket of currencies, and 0.13 per cent against the pound to $1.35.
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Analysts said the greenback’s fall was cushioned by expectations that the courts could rule Trump did not have the power to sack Cook over allegations she took out two mortgages claiming both were her primary residence.
“The relatively modest US dollar sell-off so far reflects in part uncertainty over whether President Trump’s decision to fire Fed governor Cook will stand legally,” Lee Hardman, currency analyst at MUFG, a Japanese bank, said. “It does though mark a significant step up in President Trump’s attack on the Fed’s independence, which could eventually trigger a much bigger sell-off for the US dollar.”
Cook, who is the first African-American woman to serve on the Fed’s board, said: “I will continue to carry out my duties to help the American economy as I have been doing since 2022.”
In 2021, Cook bought two properties, one in Georgia and one in Michigan, but she declared each to be her primary residence. Doing so typically entitles a buyer to a lower mortgage rate.
Jim Bianco, of Bianco Research, said the Fed had been put “in a difficult position” by Cook’s refusal to resign. “If they allow her to continue with her duties as a governor and the courts find that the president does have the authority to fire her, even if it’s months later during an appeal, anything she does on behalf of the Fed as a governor starting today will not be valid,” he said.
If Cook is removed from her post, Trump will have the opportunity to appoint his second Fed board member in a month after he nominated Stephen Miran, his chairman of economic advisers, to occupy a vacant seat when Adriana Kugler resigned from her post last month.
The revolving doors at the Fed come at a sensitive time for US monetary policy. Traders expect the bank to carry out its first interest rate cut of the year next month in response to a weakening labour market and contained inflation. Jerome Powell, the Fed chairman, who is also under fire from Trump, opened the door to an incremental monetary easing for the first time in a speech last Friday.
Two existing Fed rate-setters, both appointed by Trump, have already called for immediate rate cuts. If Miran joins in time for the September 18 meeting, he will become the third dissenter on the committee, marking the biggest division inside the institution since 1988. The Fed has kept its benchmark borrowing costs unchanged at 4.25 per cent to 4.5 per cent since December.
Trump has repeatedly called for the Fed to lower interest rates from their range of 4.25 per cent to 4.5 per cent, saying they should be as low as 1 per cent. Like the Bank of England, the Fed is charged with keeping inflation at 2 per cent by setting the base level of interest in the US economy. American inflation was unchanged last month at 2.7 per cent.