Markets barely reacted after President Trump announced his attempt to fire Federal Reserve Governor Lisa Cook. Stocks dipped only modestly, bond yields barely moved, and traders went back to watching economic data. But beneath the surface, this moment may mark one of the most important turning points in modern U.S. financial history.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
If Trump succeeds, it would effectively end the Federal Reserve’s independence from the White House, a tradition that has held since 1951. Investors may enjoy a short-term boost from lower interest rates, but history suggests the long-term outcome will be higher inflation, more volatility, and far less credibility for U.S. markets.
Trump Pushes to Seize Control of the Fed
The president is openly trying to bend the central bank to his will. His letter to Cook accused her of mortgage fraud and declared she was removed, even though she has not been charged with any crime. Cook fired back, saying Trump has no authority to dismiss her and vowed to fight in court. The point is less about the specific charges and more about Trump showing he is willing to cross lines no president has crossed before. No president has ever attempted to fire a Fed governor. By doing so, Trump has signaled that any official who defies him on rates could face the same fate.
The Strategy Is Slow but Relentless
Trump’s strategy is familiar. With tariffs, he announced massive hikes, backtracked when markets panicked, then gradually reinstated them piece by piece until traders became numb. The same process now appears to be underway with the Fed. Instead of firing Chair Jerome Powell outright, Trump is picking off governors one at a time. If he replaces Cook with his own ally, he would soon hold four of the seven board seats.
As he bragged on Tuesday, “We’ll have a majority very shortly.” Once that majority is secured, the direction of interest rates will follow the White House, not the data.
Markets Struggle to Price the Risk
So far, investors are not treating this as the seismic event it could become. They are focused on Powell’s recent comments that tariffs may not create lasting inflation, which opened the door to a September rate cut. Stocks see that as bullish, bonds see it as supportive, and traders are betting heavily on easier policy.
However, what they have not priced is a future in which rate decisions are dictated by politics rather than economics. As Evercore ISI warned clients, “Asset markets are not properly priced for what increasingly seems likely to be a rupture in Fed independence.”
What Happens If the Fed Becomes Political
The implications are sweeping. In theory, governors can vote as they wish once confirmed. But if the president can remove them for cause whenever he chooses, that protection vanishes. Even if Cook wins her legal fight, other governors may still fear that if they don’t vote with the president, they could risk losing their job.
In addition, Trump has already gone further than in his first term by demanding loyalty from his nominees. Many of his candidates openly say rates should be cut now, even with inflation still above target. That breaks decades of tradition where nominees avoided signaling policy preferences before confirmation.
Markets Face Instability if the Fed Bows to Politics
In the short run, the economy will still determine inflation. Tariffs, a cooling job market, and weaker growth will keep price pressures around three percent. But if the Fed becomes politicized, markets will stop believing that policymakers are willing to tighten when inflation rises. This credibility gap could drive long-term rates higher, even as the Fed forces short-term rates lower.
It is a recipe for instability. History shows markets rarely price in structural shifts until it is too late, whether in the inflation surge of the 1970s or the financial crisis of 2008. This could be the next blind spot.
Investors Could Wake Up to a Different World
Economists are already warning. Peter Williams of 22V described this as a tail risk that could carry massive consequences. Higher tariffs, rising Fiscal spending, and pressure on the Fed all point toward sustained inflation above target.
For investors, they may get a few months of rallies fueled by cheaper borrowing, but the longer-term trade is more dangerous. If the Fed’s independence is gone, the world’s anchor of monetary credibility is gone with it.
Stay ahead of macro events with our up-to-the-minute Economic Calendar — filter by impact, country, and more.