Global financial turmoil! Trump openly removed the Federal Reserve Board

On August 25 local time, US President Trump released an open letter through social media, announcing the immediate removal of Federal Reserve Governor Lisa Cook and accusing her of mortgage fraud. This move marks the first time in the 111-year history of the Federal Reserve that a president has fired a governor, triggering severe turmoil in the financial market. After the announcement, the US dollar exchange rate dropped in response, while safe-haven assets such as gold and the Japanese yen rose sharply, and US Treasury yields fell simultaneously.

In his open letter, Trump cited criminal transfer materials from the Federal Housing Finance Agency (FHFA), pointing out that when Cook applied for a loan in 2021, he declared two properties located in Michigan and Georgia respectively as "principal residences" in order to obtain more favorable loan terms. Trump severely accused the act of being "fraudulent and potentially criminal", and stated that "the American people cannot trust her integrity." In response, Cook firmly denied the relevant accusations, emphasizing that he was collecting evidence to clarify the facts and refused to resign due to "bullying behavior".

Although Trump invoked the clause in the Federal Reserve Act of 1913 that "directors can be dismissed for justifiable reasons", its legality has been widely questioned by the legal community. The "justifiable reasons" stipulated in this law have always been interpreted as dereliction of duty, serious misconduct or loss of ability to perform duties, rather than accusations that have not been confirmed by judicial procedures. The ruling of the Supreme Court in the Humphrey's Executive case in 1935 made it clear that the president has no right to dismiss officials of independent institutions at will. Legal experts believe that Cook can temporarily retain his position by filing a lawsuit, and the matter may ultimately need to be ruled by the Supreme Court.

Analysts point out that Trump's deep-seated motivation for pushing to remove Cook is to create more vacancies in the seven-member board of the Federal Reserve and accelerate the realization of a majority in the Trump camp. If Cook leaves his position, Trump will have the opportunity to appoint four governors, thereby completely transforming the power structure of the Federal Reserve. During his first term, Trump has appointed two current board members and has nominated Stephen Milan, the chairperson of his Economic Advisory Council, to fill the third vacancy left by the recent early departure of Adriana Kugler, who was appointed by Biden.

Controlling the Federal Reserve Board also means that Trump is capable of influencing the appointments of 12 regional Fed presidents. According to the Federal Reserve Act, the term of office for all regional Fed presidents is five years. Although their nominations are determined by the regional Fed, they must be approved by a vote of the Federal Reserve Board. Rodrigo Catril, a strategist at National Australia Bank, said that Trump's move was intended to transform the Federal Reserve into a "political vassal". If Cook's seat is taken over by Trump's Allies, the Federal Reserve Board may form a majority advocating for interest rate cuts, thereby undermining the authority of the current chair Powell.

Since the 1990s, the independence of central banks has been regarded as the cornerstone of global economic stability. However, Trump's intervention may trigger a ripple effect and shake the credibility of central banks in many countries. Trump has publicly criticized Powell on multiple occasions and even threatened to fire him. At the recent annual Federal Reserve symposium held in Jackson Hole, Wyoming, central bank officials from various countries generally expressed concern that if the world's most influential central banks yield to political pressure, it will set a dangerous precedent for other countries.

Olli Rehn, a decision-maker at the European Central Bank, said: "Politically motivated attacks on the Federal Reserve would have a mental spillover effect, spreading to other parts of the world, including Europe." Joachim Nagel, the president of the German Central Bank and a member of the Governing Council of the European Central Bank, emphasized: "This reminds us that independence should not be taken for granted." We must be clear that independence is a necessary condition for maintaining price stability.

As the independence of the Federal Reserve faces serious threats, market confidence in US dollar assets has also been questioned. Bart Wakabayashi, the manager of State Street's Tokyo branch, warned that if the president could remove directors based on unsubstantiated accusations, the "stability and credibility" of the US system would be severely damaged, thereby shaking the long-term confidence of global capital in US debt.

Charu Chanana, chief investment strategist at Saxo Bank in Singapore, believes that the market is reassessing risk expectations. If Cook is removed from his position, the Federal Reserve may cut interest rates earlier. However, this is not only about interest rate policy, but also involves the independence of the Federal Reserve and the increasing institutional risks in the United States. Shoki Omori, chief strategist at Mizuho Securities, pointed out that losing confidence in the Federal Reserve could extend to a confidence crisis in the US dollar. The market has not yet fully digested the possibility of Trump further interfering in the Federal Reserve's personnel arrangements. It is expected that the probability of a rate cut in September will rise, and the US dollar will continue to decline against the Japanese yen.