Wall Street braces for a Fed that bends to political power

President Donald Trump has called Federal Reserve officials a lot of names — “clueless,” “numbskull,” “a stubborn MORON,” “a stiff,” “too late,” “a bad person.” This time, he reached for something stronger than an insult. 

On Monday night, the president informed Federal Reserve governor Lisa Cook that she was “removed … effective immediately,” citing the Federal Reserve Act’s “for cause” clause. The allegations — old mortgage paperwork, loudly amplified by a political ally — will be tested in court. But the more important test has already begun: What happens to a central bank, to the dollar, and to global markets when the world’s most famous “independent” monetary authority looks like it can be shaped by the White House.

Markets didn’t wait for a judge. They decided something else much faster: The myth of the politics-proof Fed just took a hit, and the bruise is already showing up. The 10-year Treasury yields inched about 2.5 basis points higher to roughly 4.3% as traders added a sliver of political risk to the term premium. Short-term yields slipped on the bet that a Trump-shaped Fed would cut faster. Long bonds nudged higher on the fear that a Trump-led Fed wouldn’t tighten when inflation returned. The dollar, once the surest safe haven, lost a bit of its shine. That’s Wall Street’s way of saying, if politics can set the pace, price it in. 

Cook, a Biden appointee whose term stretches to 2038, said she’ll sue, setting up an unprecedented test of the law. Her attorney, Abbe David Lowell, said the president “does not have the authority to remove her,” and that “his attempt to fire her… lacks any factual or legal basis.” Trump’s letter called her conduct “deceitful and potentially criminal” and said he doesn’t “have such confidence in your integrity.” But even if Cook wins in court, the Fed has already lost something harder to restore: credibility.

This isn’t just a personnel squabble; it’s a clean shot at the glass that separates the White House from the world’s most consequential technocracy. And even before a judge answers the threshold questions — Is Cook still a Fed governor today? Can she still log into her government email? — the larger question is already on the table: What if the “independent” bank isn’t so independent anymore? 

Once doubt creeps into the assumption that the Fed is untouchable, the global financial system has to reconsider whether the referee can really keep calling the game.

The credibility of a central bank works like gravity — unseen, taken for granted, and only noticed when it gives way. For a century, the Fed’s pull came from a story that most people chose to believe. Yes, presidents have leaned on the Fed before. But no president had ever tried to fire a Fed governor mid-term. 

Until now.

That’s why Cook’s fight matters far beyond Washington. This prolonged battle isn’t just about one seat on the Federal Open Market Committee. It’s about whether the world’s most powerful central bank can be remade in Trump’s image, governor by governor. The independence myth has always been fragile, half fact and half faith. The Fed’s credibility is what kept borrowing costs low, what supported the dollar’s reserve-currency status, and what let Paul Volcker hike rates without presidential permission. If the White House can, essentially, hire and fire the referees, if that credibility is shaken, it doesn’t take a collapse to matter — a few basis points here, a weaker dollar there, a little less trust in Treasuries tomorrow. The costs add up fast, and markets could start to treat U.S. monetary policy the way they treat emerging markets: contingent on politics. 

When the myth meets the market

For his part, Fed chair Jerome Powell has been trying to hold the line with central-bank understatement. “The stability of the unemployment rate … allows us to proceed carefully,” he said at Jackson Hole last week, hinting at a possible cut next month while insisting that inflation remains a risk. It was classic Powell: technocratic, hedged, meant to reassure. Trump answered with the blunt instrument that has become the soundtrack of 2025. 

“We call him too late for a reason,” the president said. “He should have cut them a year ago.” 

In July, Trump made a rare presidential drop-in at the Fed’s renovation site and pushed Powell, who was standing beside him, for lower rates. “I’d love him to lower interest rates,” Trump told cameras, after calling the chair a “numbskull” earlier in the week. The scene — an active president pressing a sitting Fed chair in front of flashing bulbs — wasn’t just surreal; it was a conditioning exercise for investors. If the central bank’s decisions are shaped by proximity to the Oval Office, traders can price that proximity. 

“Undermining the Fed to get lower rates now is like ripping the batteries out of your smoke alarm because it’s beeping — it’s quiet for a bit, then your house burns down,” economist Justin Wolfers wrote on X. “Credibility anchors expectations; expectations anchor inflation.”

The rest of the world is already doing the math. Central bank independence isn’t a moral talisman. It’s an interest-rate story. Independent monetary authorities deliver lower and more stable inflation over time because they can make unpopular choices. If investors decide the Fed will no longer make those choices, the United States pays a premium — slowly at first, then suddenly. A shakier dollar. A little more term premium in long bonds. A wider spread for corporate credit. Fewer automatic buyers among foreign reserve managers. 

The Federal Reserve isn’t just America’s central bank — it’s the world’s template. The ECB and the Bank of England calibrate against it. Reserve managers from Frankfurt to Riyadh buy Treasuries on the assumption that U.S. monetary policy is insulated from politics. “People don’t realize how different the world has been in the past 30 years,” Jordi Galí told Reuters. “It has been one of stability, in part because central banks were insulated from politics.” 

Data needs credibility and independence to matter, and 2025 has delivered a one-two to both. Weeks before the Cook letter, Trump fired Bureau of Labor Statistics Commissioner Erika McEntarfer after revisions knocked down earlier job gains and nominated E.J. Antoni, whom economists on all sides of the political spectrum say is unqualified and extremely partisan. Former commissioner William Beach called the idea that the numbers were rigged “impossible.” Larry Summers called it “preposterous.” The jobs report was supposed to be the scoreboard, just as the Fed was supposed to be the referee. When you tug at both in the same month, investors don’t wait for the whistle; they adjust odds.

The end of central bank exceptionalism?

The Cook fight is the culmination of a collision between the White House and the Eccles building: try to push out a governor; install allies; force a vote that tilts the balance of the Board sooner than staggered terms were designed to allow. If courts validate the tactic, it becomes a template, not an outlier — and the question “Is Cook in the room?” will give way to a deeper one: Whose room is it?

The mechanics of independence were supposed to prevent presidents from stacking the deck. Fed governors get 14-year, staggered terms precisely so that no single president can dominate the Board. Governors can only be removed “for cause,” a phrase courts have long read narrowly. This lawsuit is for all the marbles because if Trump can stretch that clause to fit contested, pre-appointment mortgage forms, the precedent outlives Cook. Every president, red or blue, will know that the firewall is drywall.

A Fed in Trump’s image is easy to imagine. The reaction function tilts political; rates lean dovish into election cycles as a White House that wants faster growth can read the dot plot as a suggestion, not a constraint. “We will proceed carefully” becomes a talking point rather than a commitment; “data-dependent” becomes elastic enough to snap. The practical fallout shows up everywhere money touches: a few extra basis points on Treasury borrowing that compound into real fiscal costs; mortgage rates that refuse to fall as quickly as headline policy cuts suggest; corporate debt that clears — but a little slower, a little less often, with a little more yield. Bank supervision loosens. Policy statements get tuned for political optics. Independence survives in statute but not in practice. 

And you also lose something harder to price: the American example. 

For decades, Washington told emerging markets to build institutions that could say no to politicians. The Fed was Exhibit A. The export was a playbook for credibility. Once the U.S. looks like Turkey on personnel and Argentina on data, the lecture circuit is closed. You don’t have to believe the dollar is suddenly at risk — there’s no near-term replacement — to see how a slow diversification away from Treasuries becomes rational for reserve managers if they think politics will begin to call the tune at the margin. 

“Turkey is the cautionary tale,” economist Wolfers posted on X. “Erdogan swapped economists for loyalists and forced low rates. Result: Inflation peaked at 86%, still painfully high. That’s the movie you don’t want a sequel to.”

Washington’s next few procedural choices matter — whether the Fed treats Cook’s seat as vacant pending litigation; whether the administration moves ahead with a nominee immediately; whether the Board, in its own communications, leans into explicit independence language in the statement and the SEP. Each small cue tells traders which of two models they should weigh more heavily: the technocratic one that has defined a generation of policy or the improvisational one that takes its cues from the West Wing.

There’s a version of this story that has a tidy ending. The courts say Trump can’t do this. Cook stays. Powell moves a quarter-point, or doesn’t, and the Fed reasserts itself in prose as dry as Wyoming scrub. In that world, the damage is reputational but containable, and the glass looks sturdier than the cracks made it seem. But there’s also the messier, more likely ending in which the lawsuit drags, the political theater continues, and the forward curve keeps a little wedge in it labeled “politics.” Investors can live with that — they price uncertainty for a living — but the bill will come due in higher borrowing costs and thinner deference to the U.S.’ monetary umpire.

Still, both scripts end the same way: The credits roll on a Fed that looks a little less independent than it used to.