Investors barely flinched at Donald Trump’s attempt to fire Federal Reserve governor Lisa Cook.
US bond yields were up only slightly, while the dollar softened a little.
The apparent calm is noteworthy, given Trump’s move is a direct threat to the Fed’s independence, and to the credibility of US monetary policy.
Cook, like her colleagues, is tasked with weighing evidence and voting on interest rates to meet the Fed’s dual mandate: price stability and maximum employment.
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Trump’s attempt to remove her “for cause” – she is accused of mortgage fraud – is legally dubious and politically unmistakable: dissent will not be tolerated.
Former Fed chair Janet Yellen is sounding the alarm, calling the move “profoundly dangerous” and a “direct attempt to politicise the Fed, intimidate its leadership and bend monetary policy to the president’s will”.
Similarly, Bill Dudley, ex-New York Fed president, warned that even a small chance of Fed capture is disruptive, with risks for inflation, borrowing costs and the dollar.
This is part of a broader pattern. Earlier this month Trump fired the Bureau of Labor Statistics commissioner after a weak jobs report, then nominated a friendly Heritage Foundation economist to replace her.
Now he’s taking on the Fed. As Yellen observed, history shows that politicised central banks – from Weimar Germany to today’s Turkey – end up with the same mix: higher inflation, volatile growth and battered currencies.
“So why,” asks economist Paul Krugman, “aren’t markets freaking out?”
It’s a fair question. Investors are betting the guardrails built into the Fed’s structure can withstand a president determined to test them. History suggests that is not a bet to take lightly.
