President Donald Trump’s effort to remove a governor from the Federal Reserve Board is raising high-stakes economic and political questions about the central bank’s independence.
On Monday evening, Mr. Trump announced the removal of Lisa Cook, citing allegations that she has committed mortgage fraud.
The move already faces a legal challenge, but could have widespread ripple effects from the U.S. economy to legal precedents governing presidential power. It’s part of a series of similar allegations the Trump administration has made against some of the president’s political enemies.
Why We Wrote This
America’s central bank is designed by Congress to be insulated from political pressure. That standard is under strain as President Donald Trump, seeking influence over monetary policy, tries to oust Lisa Cook from the Federal Reserve Board.
Federal laws serve to insulate the Fed – and thus U.S. monetary policy – from political influence. Such independence, common to the most trusted central banks around the world, is widely seen by economists as a crucial defense against political pressures that can lead to harmful levels of inflation.
Many presidents have been frustrated by their lack of power over the central bank, but Mr. Trump has been making a rare overt effort to erode that independence, including a monthslong pressure campaign to make the Fed lower interest rates.
Attorney Abbe Lowell has announced a lawsuit on behalf of Dr. Cook, calling her firing legally baseless. Dr. Cook has not been charged with a crime, but some legal experts say a president removing a board member before charges are filed is probably lawful.
Overall, Mr. Trump’s attempt to dismiss Dr. Cook represents an escalation on two fronts: Mr. Trump’s efforts to exert greater control over the Fed, and his pivot toward targeting political opponents with criminal investigations – seemingly in conflict with a campaign promise to end such “lawfare” that he says motivated prosecutions against him in recent years.
How have markets responded?
They tanked in April when President Trump threatened to fire Fed Chair Jerome Powell. But they hardly blinked on Tuesday after his announced firing of Dr. Cook.
“Markets have been remarkably accepting, particularly the equity market, of this enormous broadside to Fed independence,” says Mark Spindel, founder of Potomac River Capital, an investment firm based in Washington, D.C.
The real fireworks, he says, will come if and when the president replaces Mr. Powell with someone seen as willing to do his bidding. Such an appointment would clearly call into question the Fed’s ability to set interest rates without political interference.
Why is independence important for the Fed?
America’s central bank aims to keep the nation’s economy and financial system stable. Politics tempts presidents to focus on their own short-term advantage rather than the long-term health of the economy. They’re often pushing the Federal Reserve to lower interest rates to make it cheaper for businesses and consumers to borrow money. The economy hums because people buy goods and services and firms expand.
But that loose monetary policy allows companies to raise prices and sets the stage for inflation to rise. That’s when the Fed is supposed to step in, raise interest rates and slow the economy. Presidents don’t like that. Over the long term, nations with independent central banks tend to have more stable prices than those where politicians can meddle with rates.
Fed watchers say Mr. Trump is trying to gain control over the committee that sets interest rates, known as the Federal Open Market Committee. He already has two appointees on the seven-member Board of Governors and has nominated his senior economic adviser for another vacancy. Should the removal of Dr. Cook withstand legal challenges, he could have four seats on the governing board. If Mr. Powell gives up his board seat when his tenure as chair ends next May, as Fed leaders usually do, Mr. Trump could have five seats by next year. The rate-setting committee includes all the board members plus five presidents of regional Fed banks, who are not appointed by the president.
U.S. Federal Reserve, Congressional Research Service
|
Jacob Turcotte/Staff
What is mortgage occupancy fraud?
A long-running issue in the housing industry, mortgage occupancy fraud essentially means lying on a mortgage application form. For people with multiple homes, lenders offer better mortgage rates for a primary residence than for a second home or investment property. Owners of second homes also often must pay higher property taxes and insurance premiums than for primary residences.
Thus, claiming multiple primary residences in essence cheats lenders and taxing entities out of money. In addition to Dr. Cook, Sen. Adam Schiff of California and New York Attorney General Letitia James, both Democrats, have been accused of committing similar mortgage fraud crimes. None has been charged.
How common is it, and how is it punished?
Mortgage fraud is a nationwide problem that that the FBI considered a priority before Trump’s first presidency.
However, investigations of mortgage fraud typically target large-scale homebuyers responsible for defrauding large sums, not individuals who own a few different properties. Mortgage fraud cases in general are rarely prosecuted, lawyers say. Mortgage fraud can carry a maximum punishment of 30 years in prison and up to $1 million in fines, the Wall Street Journal reported.
What are the allegations?
Most of the allegations have come from Bill Pulte, the head of the Federal Housing Finance Agency. The agency oversees Fannie Mae and Freddie Mac, which together support roughly 70% of the U.S. mortgage market.
The FHFA in recent weeks has submitted criminal referrals to the Justice Department accusing Dr. Cook, Senator Schiff, and Ms. James of committing mortgage fraud.
Dr. Cook in 2021 claimed a home in Michigan and a condo in Georgia as her primary residences, according to a social media post from Mr. Pulte last week.
In a referral filed in May, the agency claims that Senator Schiff named a Maryland home as his primary residence for a decade even though the law required that his primary residence be in his home state. Mr. Schiff, who was part of congressional investigations into Russian interference in the 2016 election and into the Jan. 6, 2021, attack on the U.S. Capitol, also claimed a tax exemption on a condo in California, according to the FHFA referral.
In a referral filed in April, the agency also claims that Ms. James listed a Virginia property as her primary residence in 2023 despite holding public office in New York, and that she also misrepresented a Brooklyn property she owned in 2021.
While the FHFA has made these allegations, no charges have yet been filed in any of the cases. Senator Schiff and Ms. James have described the allegations as false and politically motivated.
Can the president fire a Fed governor?
The Federal Reserve’s independence is protected in part by a law holding that the president can only remove members of its governing board “for cause.”
Essentially, the president must have a valid reason beyond policy disagreements to fire a Fed governor. The most common justifications for “for cause” removal have been “inefficiency, neglect of duty, or malfeasance,” according to legal scholars.
Jack Goldsmith, an assistant attorney general during the George W. Bush administration, said in a social media post that Dr. Cook’s firing “may be pretextual but is not obviously illegal.”
In his Monday night letter removing her, Mr. Trump cited the FHFA criminal referral that she “may have made false statements on one or more mortgage agreements.” Whether that will be enough to uphold her firing remains to be seen.
“It’s up to courts to define what cause [is] and what rises to cause. There hasn’t been a criminal indictment, there have been allegations,” says Mr. Spindel.
The removal also comes as Mr. Trump has pressed for greater power to unilaterally fire the leaders of independent federal agencies. The Supreme Court has for the most part blessed this legal shift, but the justices have specifically kept the Federal Reserve Board out of the president’s reach – because the Fed “is a uniquely structured, quasi-private entity.”
