Lisa Cook and the fight for the Fed

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Sally Helm: This is Planet Money from NPR. On Monday evening, Brendan Greeley is in his home office in Maryland, finishing up a book he's been working on forever.

Brendan Greeley: I was sitting right here. I was sitting in this chair. This dog was sitting next to me. I was editing a document that is still open about the creation of euro dollars.

Sally Helm: Brendan is getting his PhD at Princeton and has been studying the long, long arc of financial history. His almost-finished book is a 500-year history of the dollar. But for 20 years, he was a journalist, a Fed watcher. He's covered the Federal Reserve, the nation's central bank. So on Monday, he's working away.

Brendan Greeley: And you opened Blue Sky to procrastinate. Yes, that's exactly what I did. I opened Blue Sky to procrastinate. And that's when you saw it. And that's when I saw that Donald Trump had declared that he had fired Lisa Cook.

Sally Helm: Dr. Lisa Cook is an economist. She was appointed by President Biden to the Federal Reserve Board of Governors. She is the first and only Black woman to hold this post. And what Brendan is seeing on Blue Sky is that President Trump has just said he's firing her.

Brendan Greeley: A president has never fired a member of the Fed Board of Governors before in history. To do that legally, a president needs cause. Basically, the person has to have done something wrong. The president claims that Lisa Cook may have made false statements to get a better deal on her mortgages. He says that's cause to fire her.

Sally Helm: Brendan told us the alleged wrongdoing is pretty small potatoes. These are allegations on the level of, did you lie about the size of your home office in your tax returns? Not typically something that we root out and prosecute.

Brendan Greeley: In response, Lisa Cook has filed a lawsuit. And a judge held a hearing to consider her request to stay in her post while the case is sorted out. As of Friday at 3:15 p.m. Eastern, there has been no decision. Through a lawyer, she's said that no cause exists under the law for the president to fire her. She applied for these mortgages before she was on the Fed board and in her personal capacity as a person. She's arguing, no matter how you slice it, this is not cause. The president and his people argue, yes, it is. This is all going to be adjudicated probably eventually by the Supreme Court.

Sally Helm: But the legal questions are not the focus of our show today. Today, we're going to talk about why President Trump may have gone after her. For months now, the president has been waging a pressure campaign against the Federal Reserve because he says he wants lower interest rates. He's been talking about how he wants to fire the chair, Jerome Powell. And this is a new tack.

Brendan Greeley: Now, Brendan, remember, is studying the long arc of financial history. And he says this move feels like a sea change to him. A big one, even in a sea of changes. Because the independence of the Federal Reserve is like a sacred economic rule. The decisions that the Fed makes have wide-ranging consequences for the economy, and the idea is that they need to be able to make those decisions free from political influence, to just do what is best for all of us in the long term. President Trump's moves have put all that in jeopardy, and this is a big escalation.

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Brendan Greeley: I walked out into the kitchen and everybody was having a pretty nice night getting ready for the first day of school today. And like, I wasn't going to be like, kids, the president attempted to fire Lisa Cook. Put your forks down, kids. I wasn't going to do that to my wife. I wasn't going to do that to the kids. I was disturbed. You know, we all have our moments when we sort of look at what's happening right now in America and thinking that this is really different from what came before. And this is, for me, one of those moments.

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Sally Helm: Hello and welcome to Planet Money. I'm Sally Helm. And I'm Mary Childs.

Mary Childs: President Trump's attempted firing of a Fed governor, that is unprecedented interference at the nation's independent central bank. Today on the show, who are the Fed governors? What do they even do? And why does this matter? We hear from people who used to be in that very job to find out what interest rate mechanics they have their hands on and what we might be in for.

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Mary Childs: For now, as of Friday afternoon, Fed Governor Lisa Cook is still in her job. But if President Trump does get to replace her, we wanted to know what could happen and what might that mean for interest rates and for the economy. Alan Blinder told us this move by President Trump to replace Lisa Cook looks like an attempt to stack the Federal Reserve with loyalists. He's basically saying these are not his words. I want this Biden appointee out so I can put in a sycophant who's going to do whatever I want.

Alan Blinder: President Trump has already appointed two Fed governors. There's an opening on the board currently. He will get to fill it. So if he also gets to replace Lisa Cook, then he would have appointed four of these governors out of seven. So a majority. And he's clearly hoping that those Trump appointees will then vote to lower interest rates. And he said he wants a huge cut. Normally, when Fed governors talk about lowering rates, they mean by like 25 basis points, like a quarter percentage point. 25 basis points, maybe 50 basis points. What the president wants is something much, much lower than that. He wants 300 basis points lower. Would it be hard to find someone with traditional credentials to join the board who would want to cut three percentage points? I would think so. I just can't imagine. But say he does it. Say he gets to appoint two new Fed governors who are willing to make a massive cut. Then the question is, will the board do what he wants? And it kind of depends. The two Trump appointees currently on the Fed board, there's no guarantee that they'd agree to something like this. They're both pretty mainstream central bankers. They did both want to lower rates at a recent FOMC meeting while everyone else voted to hold rates steady, but they wanted to lower rates by a normal 25 basis points. And they very much could have just believed based on what they're seeing in the economy that that was the right move. As Betsy and Alan both said, the decision's just not always clear. Fed Chair Jerome Powell has indicated that rate cuts are probably coming next month, so wanting a rate cut last month, not unreasonable. Plus, four Fed governors would be a majority of the Fed board, but not a majority of the FOMC, the committee that sets interest rates, because of those regional Fed bank presidents. Five of them also vote. And the U.S. president does not pick those people. But the board of governors does have to reconfirm or choose those regional presidents every five years. And that just so happens to be coming up within the next six months. So in theory, a group of Trump appointees could use that moment to, like, stage a political takeover, which would be an incredibly big deal. So that is some of the potential machinations here. But say he gets all that. The odds are not high, but it's not impossible. Lowering rates a lot without the economic conditions to justify it, economists are pretty sure that the economy wouldn't play along. President Trump's an exceptionally clear example of this. But in general, if you leave interest rate decisions to politicians, they're almost always going to make interest rates too low. And what do I mean by too low? I mean, give you an economy that's too hot, so that helps you get elected. And then later the inflation comes and you wind up with high inflation. This is what the economic research shows happens. When politicians pressure central banks to lower interest rates, that very often leads to inflation. Maybe because officials lower rates when they shouldn't. But there's this other factor. When people even just think that political interference will lead to inflation They start to expect it which leads to them requesting wage increases and to businesses raising their prices anticipating higher costs And this can snowball into actual high inflation. Betsy says you do see high inflation in countries where the central bank is not independent. Think of Argentina, which has had outrageous levels of inflation. Think of Turkey. And that's the path that we would be going down if our central bank is not independent. Well, you know, that's what the research would tell you. I just hope we're not getting ready to go down a path of a real-life experiment to find out if that's true. If we do go down that path, markets will almost certainly react. Because people in the market also know that a not-independent central bank means inflation. So everyone trading in the market will prepare for that inflation. By demanding higher interest rates, rates would go up, including probably mortgage rates. Ironically ruining the effect President Trump says he's going for. And, Alan told us, if things start to look contentious or confusing on the FOMC, that too would freak the markets out. If they see the Federal Open Market Committee going haywire, they lose that ability to predict what this committee is going to do, and therefore they lose the ability to figure out what they should do. And that's the kind of thing that can make market crashes, bond market rates zoom up, the dollar fall. You said that could make the market crash. I mean, that sounds like a potentially really bad outcome. Yeah, it is a potentially really bad outcome. This has not happened so far. So far, it doesn't look like markets have reacted very much to the current news, but I think that's because it's at a standoff right now. The markets, stocks, bonds, whatever, seem to be waiting to see how it all shakes out. Not gonna freak out until they have to. So there is a pretty good chance that what President Trump is doing would not even lead to his stated goal of lower interest rates in the economy. Which kind of goes to show something that Brendan Greeley, the Fed-watching historian, told us. He thinks this whole thing is not really about interest rates. I really have come to believe that what's happening right now is about displaying dominance. And that those of us who think about policy don't understand dominance.

Brendan Greeley: And he also thinks that the Fed, because they see themselves as so apolitical, they're not really prepared for a moment like this. This is a naked political attack. We should not dignify these allegations by assuming, well, we should let this work its way through the courts. That's not what's happening here. Like, a member of the Fed was openly smeared to get her to voluntarily resign. You have to figure out ways of openly saying, you are wrong. This is important. These are the boundaries. And the Fed's not good at doing that. The Fed did eventually put out a response. It said Congress directs the governors to serve long fixed terms and that a president can only remove a governor for cause. They said, quote, long tenures and removal protections for governors serve as a vital safeguard, ensuring that monetary policy decisions are based on data, economic analysis, and the long term interests of the American people. End quote. To Brendan, the statement was better than nothing, but not by a lot. One of the things that worries me both for America and for this book that I'm writing is that... Of equal importance, let me note. I have tried, because it's a 500-year history of the dollar, I've tried to focus on these, like, apocle changes. You know, the book only dips into the history, like, once every 100 years or so. I've really tried to figure out, like, when did something really change? Like, and the thing that I think is like, maybe we're in another one of those moments. He had his gripes about the Fed before all this, but now he's like, you know what? They weren't so bad. Anytime somebody wants to blow up the Fed, I think like, man, whatever replaces this is going to be way worse. If we could just, I had so many complaints about the old Fed, but if we could just have the old Fed back, that would be great. I would be happy. Meaning like stop the interference stuff. Meaning, don't know what you got till it's gone. Right? It said they fired a Fed chair and put up their own nominee. We can workshop that. Yeah. If you would like to dive deeper on this topic, we have covered the Fed a lot. We've discussed why Fed independence is so important for the economy, the Fed's origin stories, and the time President Nixon tried to pressure the Fed. Those episodes and more are in the show notes.

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Sally Helm: This episode was produced by Willa Rubin and edited by Jess Chang. It was fact-checked by Sierra Juarez, engineering by Robert Rodriguez and Sina Lafredo. Alex Goldmark is our executive producer. I'm Sally Helm. And I'm Mary Childs. This is NPR. Thanks for listening.

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