The markets reacted to Donald Trump’s firing of Fed Governor Lisa Cook earlier this week in the same way that it’s reacted to a lot of things lately. With a lot of indifference. The markets barely moved despite the fairly significant implications of what could happen if this is just the first step of the Fed losing its independence.
Independent central banks that maintain their independence have traditionally done a much better job of keeping inflation rates in check and promoting steadier longer-term growth in developed economies. This is in contrast to those where political figures exert too much influence over the decision making process.
Political interference in monetary policy creates dangerous cycles. Countries that have compromised central bank independence usually experience negative side effects, including currency volatility, flights of capital out of the country and higher inflation. Early signs of this pattern are now appearing in both investor sentiment and within parts of the market where threats against Fed Chair Powell and other officials raise the threat of instability.
The Fed’s independence has been necessary for long-term economic stability for over a century. Yet, this fundamental principle now faces its most serious challenge in decades. The question isn’t whether political pressure on the Fed matters. The question becomes what happens next if this independence erodes further.
The Critical Nature of Fed Independence
Central bank independence represents one of the most important economic innovations of the modern era. When monetary policy remains insulated from political pressures, central banks can make difficult but oftentimes necessary decisions based on economic data. This “separation of powers” that helps prevent political influence has helped the U.S. economy avoid some of the worst case scenarios that have befallen countries, such as Argentina and Turkey. It allows for consistent policy focused on long-term stability rather than short-term political gains.
They can raise interest rates during economic booms, even when politically unpopular, to prevent overheating and inflation. Likewise, they can provide stimulus during downturns without political interference. This consistency creates predictability for businesses, investors and consumers.
On the flip side, politically controlled central banks typically prioritize selfish interests. There’s the possibility of creating stimulus measures in situations that don’t otherwise warrant it in order to win elections and improve popularity. Given the lead time of economic shifts, this may not result in much in the short-term, but the long-term implications could be disastrous. The temptation for politicians to stimulate the economy before elections and then deal with the inflationary consequences later (or let their successor do it) proves nearly irresistible without barriers.
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Trump Escalates Pressure on Fed Leadership
This month, Trump crossed a line no previous president has approached by firing a sitting Federal Reserve governor. The dismissal of Lisa Cook represents more than another political skirmish. It marks the first time in the Fed’s history that a president has attempted to remove a governor from the board. Trump announced Cook’s firing through social media, claiming she committed mortgage fraud before her Senate confirmation.
As of right now, Cook refused to accept this dismissal quietly and immediately filed a lawsuit seeking an emergency injunction to block her removal. Of course, she claims the allegations are unsubstantiated, but since there’s no clear precedent here, it’s difficult to say how this might turn out. If Trump is successful in his efforts, there may be little standing in the way of any sitting president from firing an entire board and installing his hand-picked FOMC.
Consequences of Compromised Independence
When central bank independence erodes, several predictable consequences typically follow.
Inflation expectations rise as markets anticipate politically motivated monetary policy. This expectation alone can trigger actual inflation through wage demands and price-setting behavior, creating almost a self-fulfilling prophecy.
Currency markets typically react negatively. The dollar has already been trending lower throughout 2025 as a number of factors influence the forex market, but the prospect of politically influenced monetary policy could reduce confidence even further. International investors demand higher returns to compensate for this additional risk and that’s likely to push interest rates higher and potentially trigger capital flight.
Economic planning becomes more difficult for businesses and households. The predictability that comes with independent monetary policy disappears and that could make long-term investment and decision making riskier. Companies become more hesitant to expand operations or hire new employees when they cannot reasonably forecast future economic conditions.
Economic inequality may worsen. Inflation hits lower-income households hardest as they spend more of their income on staples and generally hold fewer assets.
Conclusion
The current challenge to Fed independence represents an unprecedented test of America’s monetary institutions. The result is likely to be bad even if it hasn’t shown itself until this point. We might see modest changes, such as inflation expectations and swings in the dollar and/or interest rates, but the real risk comes if Trump succeeds in getting rid of Cook (and eventually Powell). If he’s able to wrestle control and begin making policy decisions in his own interests, the market might have a volatile response.
History leaves little doubt: when central banks lose independence, economic performance suffers. Political interference in monetary policy tends to lead to higher inflation, currency instability and unpredictable economic cycles.
The coming months will be telling on whether America’s institutions can withstand this test or whether a new era of politically influenced monetary policy has begun. Either way, markets will continue sending signals about the importance of these guardrails.
The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.
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