Federal Reserve Governor Lisa Cook faces dismissal and a legal battle that raises questions about Fed independence from a White House focused on cutting rates. Short-term bond yields fell on expectations of looser policy, while long-term yields rose on concerns about higher future inflation. Cook's role for the September 16–17 meeting is uncertain as she plans to appeal and the Fed will follow judicial rulings. Markets assign an 87% probability of a Fed rate cut, up from 84% last Friday. Cutting while inflation rises would break an unwritten rule; Bank of America notes the last similar episode was late 2007. Employment has weakened recently, Powell signaled a policy shift, and U.S. inflation was 2.7% in July.
The dismissal pending an imminent legal battle of Federal Reserve Governor Lisa Cook has called into question the sacrosanct independence of the U.S. central bank from a White House that is all but obsessed with cutting interest rates. The impact on the market has been clear, but limited in magnitude: Cook's future will be decided in the courts, and in any case, it does not alter the balance for the Fed's upcoming decisions. Still, short-term bonds have fallen on expectations of a looser monetary policy,
The most immediate focus is the September 1617 meeting, where Cook's presence is in limbo: Trump considers her dismissed, she plans to appeal the termination on the grounds that it is without legal basis, and the Federal Reserve will abide by judicial rulings. The turmoil has not significantly altered market expectations: they assign an 87% probability that the Fed will cut interest rates, compared to 84% last Friday.
According to a Bank of America report, this scenario hasn't occurred since the second half of 2007, on the eve of the Great Financial Crisis, when the Fed chose to cut rates amid rising global energy and food prices prioritizing early signs of weakness in housing and labor markets that eventually led to the worst financial crisis in 80 years, fueled by excessive debt and complex financial engineering that concealed real risks.
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