The dollar weakened, and US borrowing costs increased after President Donald Trump claimed to have dismissed Federal Reserve governor Lisa Cook, escalating his conflict with the nation’s independent central bank.
In an unprecedented move in modern US history, Trump announced on Tuesday evening that Cook was “effective immediately” removed from her position on the Fed’s seven-member governing board due to allegations of mortgage fraud. Cook has denied any wrongdoing and stated she would not resign, setting the stage for a legal battle over whether the president has the authority to dismiss a Fed governor.
This dispute arises as Trump intensifies pressure on the central bank to implement significant interest rate cuts to bolster the economy and the job market. Following Trump’s remarks, investors sold US government bonds, causing yields on 30-year Treasuries to rise by 0.06 percentage points to 4.92 per cent. The dollar declined by 0.15 per cent against a basket of major currencies and 0.13 per cent against sterling, falling to $1.35. Gold, traditionally a safe haven, increased by 0.4 per cent to $3,388.60 an ounce, reaching its highest level since 11 August.
Wall Street equities recovered from a volatile start to close higher, with the S&P 500 and Nasdaq both gaining 0.4 per cent. Analysts suggested that the relatively modest decline in the dollar reflects uncertainty over whether Trump’s decision will withstand legal scrutiny. Lee Hardman, a currency analyst at MUFG, commented, “The relatively modest US dollar sell-off so far reflects in part uncertainty over whether President Trump’s decision to fire Fed governor Cook will stand legally. It does though mark a significant step up in President Trump’s attack on the Fed’s independence, which could eventually trigger a much bigger sell-off for the US dollar.”
Cook, who became the first African-American woman appointed to the Fed board in 2022, has been accused of improperly declaring two separate properties in Georgia and Michigan as her primary residence to secure lower mortgage rates. She stated on Tuesday, “I will continue to carry out my duties to help the American economy as I have been doing since 2022.”
While a Federal Aviation Administration-style probe into the pilots’ actions was not applicable here, Fed insiders warned that Cook’s refusal to resign complicates the central bank’s operations. Jim Bianco, of Bianco Research, noted, “If they allow her to continue with her duties as a governor and the courts find that the president does have the authority to fire her, anything she does on behalf of the Fed as a governor starting today will not be valid.”
If Cook is forced out, Trump will have the opportunity to appoint his second Fed governor in a month, following the nomination of his economic adviser Stephen Miran to a vacant seat created by Adriana Kugler’s resignation.
The turmoil at the Fed comes at a crucial point for US monetary policy. The central bank has maintained interest rates at 4.25–4.5 per cent since December, but traders anticipate the first cut of the year in September in response to a weakening jobs market and inflation remaining steady at 2.7 per cent.
Fed chair Jerome Powell, who is also facing criticism from Trump, indicated last week that incremental rate cuts might be considered. Two current Fed rate-setters, both Trump appointees, have already advocated for immediate easing. If Miran joins in time for the 18 September meeting, he would become the third dissenter on the committee, marking the most significant internal split since 1988.
With Trump demanding rates as low as 1 per cent, the confrontation with Cook has heightened concerns about the erosion of Fed independence — a principle long regarded as vital to maintaining credibility in US economic policy.
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