Roger W. Ferguson Jr. is the Steven A. Tananbaum Distinguished Fellow for International Economics at the Council on Foreign Relations. Maximilian Hippold is a research associate for international economics at CFR.
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Earlier this week, President Donald Trump moved to fire Federal Reserve Governor Lisa Cook, accusing her of mortgage fraud. Cook refused to accept the dismissal and instead filed a lawsuit to challenge the move.
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This is an unprecedented development in the history of the Federal Reserve and many aspects of the case remain unclear. First, the administration has only alleged that Cook made false statements on her personal mortgage applications. It is not clear that the Department of Justice will bring formal fraud charges and, if so, whether Cook will be found guilty. Second, even if guilt were to be established, actions taken as a private citizen may not be sufficient cause for removal. In May, the U.S. Supreme Court indicated that the president may dismiss Federal Reserve Board members only “for cause.” Whether the allegations of mortgage fraud meet that threshold will likely be decided in court—and could ultimately reach the Supreme Court. Legal experts, meanwhile, have expressed skepticism about the administration’s position and questioned whether the president’s justification is sufficient to establish cause.
The president’s efforts to remove Cook and his sustained public pressure on Fed Chair Jerome Powell risk undermining the bank’s independence—a cornerstone of U.S. economic stability. The move has heightened tensions ahead of a critical interest rate decision in September.
A pivotal moment for U.S. central banking
The attempted dismissal of Cook marks the latest escalation in a broader campaign of public pressure on the Federal Reserve during Trump’s second term. The overarching concern is that the Trump administration sets a dangerous precedent that could harm the independence of the Federal Reserve and may have already done so. Eroding trust in the central bank’s autonomy has implications far beyond any single administration. It threatens the role of the dollar as the world’s reserve currency and the ability of the United States to service the national debt. Ultimately, it could harm the Federal Reserve’s ability to conduct independent monetary policy.
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History shows that political interference in monetary policy has triggered severe economic crises in numerous countries, most recently Turkey. Starting in 2019, President Recep Tayyip Erdoğan installed his allies at the central bank that would support his unorthodox views on monetary policy. As a result, inflation skyrocketed, reaching 75 percent at its peak in May 2024.
An independent Federal Reserve is the cornerstone of a stable bond market and a healthy economy. As we argued in a recent article, safeguarding that independence is critical to the stability of the dollar and the entire U.S. financial system.
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A critical juncture in the Fed’s monetary policy
The political turmoil at the Federal Reserve coincides with important interest rate decisions at the upcoming meeting of the Federal Open Market Committee (FOMC) in September. The FOMC faces a complicated economic landscape with high levels of uncertainty. Because of its dual mandate, the Fed must weigh concerns about both inflation and the labor market.
Contrary to many expectations, Trump’s tariff policies have not yet produced a surge in inflation. However, inflation remains above the Fed’s 2 percent target at 2.7 percent, while core inflation—excluding volatile food and energy components—remains elevated at 3.1 percent. The risk of higher inflation still looms: the effects of tariffs on consumer prices will likely materialize over the upcoming months as businesses start adjusting to the new environment and pass costs onto consumers. Even if taken together they only represent a one-time increase in price levels. Trade agreements with Canada, China, and Mexico—the United States’ most important trading partners—remain unsigned. Adding to the uncertainty, Trump tends to use tariffs as political leverage, frequently calling them on and off. Most recently, he threatened additional tariffs on imported furniture, a move that could raise costs for U.S. consumers.
Recent downward revisions to job growth over the past three months suggest the labor market may be starting to cool. Updated data released in July [PDF] showed that the economy added 258,000 fewer jobs in May and June and hiring slowed to 73,000 jobs in July. Unemployment, however, remains low at 4.2 percent, which is roughly consistent with full employment. The administration’s crackdown on immigration may also be constraining labor supply, further complicating the outlook.
The Fed’s dilemma is clear: cutting rates while inflation is above target and tariff risks persist could stoke price pressures. Delaying action risks falling short on the “full employment” side of its mandate if the labor market is indeed weakening. Powell has hinted at a possible rate cut in September, and markets have rallied in anticipation. Incoming data ahead of the next FOMC meeting may provide a clear picture of which direction the economy is heading. At this stage, the most likely scenario is a single, “hawkish” cut, followed by a pause to assess incoming data for the remainder of the year.
Institutional integrity in an era of uncertainty
Cook’s lawsuit is making its way through the courts, and it is unlikely to have any immediate impact on the Federal Reserve’s upcoming monetary policy decision in September. The Fed has stated it will comply with any judicial rulings related to the case, thereby insulating itself from accusations of obstructing presidential directives.
Yet, in a moment of heightened economic uncertainty and ahead of pivotal policy decisions, the Fed finds itself increasingly entangled in political dynamics. Trump’s move against Cook and mounting pressure on Powell threaten to erode the institution’s independence. Safeguarding its integrity is vital not only for sound monetary policymaking but also for maintaining the dollar’s status as the world’s reserve currency in an increasingly volatile global environment.
This work represents the views and opinions solely of the authors. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy
Austin Steinhart created the graphics for this article.