When Donald Trump meant his intention to dismiss Lisa Cook from the Federal Reserve (Fed), the governor immediately turned to the courts to prevent his dismissal. The cause is closely followed: the independence of the American central bank is seen as crucial for the stability of the economy.
“It is alarming, from the point of view of the rule of law and democracy, but also economically, because there is the potential for it to go very badly, with rising prices, markets that collapse,” comments Amit Agarwal, lawyer for Protect Democracy, where he works mainly on causes related to the separation of powers.
The non -profit organization, founded in 2016, is devoted to the “fight against authoritarian threat, the construction of more resilient democratic institutions and the protection of () freedom and () liberal democracy”.
Photo Jim Urquhart, Reuters archives
Lisa Cook, governor of the Federal Reserve
But the lawyer could hardly be taxed as an extremist on the left: the current procuire general Pam Bondi, then prosecutor of the Florida, appointed him general solicitor of the State in 2016. Previously, he had worked in the offices of the current conservative judges of the Supreme Court Samuel Alito and Brett Kavanagh.
A question of reason
The stake is greater than the divisions between Democrats and Republicans, underlines Mr. Agarwal. “There is practically a consensus that the president’s suggestion concerning a possible reprehensible act (by Lisa Cook) is a manifest pretext,” says the lawyer.
Possible mortgage fraud has been put forward to rule out Lisa Cook from her post to the Council of Fed governors. Mme Cook was not found guilty of any crime and no accusation was made against her; An investigation has been opened recently.
The judges must therefore determine whether it is a “valid reason” for dismissal, the only reason that a president can invoke to dismiss a member of the Fed. Since the establishment of the institution by the congress in 1913, no president had previously tried to dismiss a member of the Central Bank.
A majority
“We will have a majority very soon” at the Fed Council, Trump welcomed last week.
Appointed by the Biden administration, Lisa Cook must be in post until January 2038. If the president and vice-president of the Fed are appointed for 4 years, the five other members of the Governors’ Council have a 14-year term.
The eagerness to dismiss mme Cook to replace it with a person aligned on their vision may be explained by a meeting of Fed members in mid-September, during which the key rates will be discussed.
Rate
Trump did not hide his impatience to see interest rates go down. He publicly insulted the president of the Fed, Jerome Powell, in front of his refusal to comply in recent months. Powell has let a possible drop in the key rate are shining soon, justifying it by economic indicators.
The president is not the only politician to defend the idea publicly. In contrast to the political spectrum, Democratic Senator Elizabeth Warren also called for a drop, citing the housing crisis.
Politicians like low interest rates, because there are short -term effects: with a drop, there is a stimulus in activity, greater demand, companies like it. Typically, unemployment decreases. But possibly, prices go up. Except it happens later.
Thomas Drechsel, associate professor of economics at the University of Maryland
The role of the central bank is precisely to ignore political cycles – with their short -term horizon – to try to maintain stability in the economy. Hence the 14 -year -old mandates.
The magistrates of the Supreme Court have already underlined the independence of the Fed and its “unique” character, in particular in a decision rendered in May on the dismissal of other federal employees.
Independent without being waterproof
“The idea (of a central bank) is to give the authority of monetary policies to people who are very unfavorable to inflation, more conservative on the question than the average citizen or the Middle elected official, to maintain optimal conditions,” explains William Clark, professor of political science at A & M Texas University. If politicians established monetary policies and guiding rates, they would be likely to favor the interests of their short-term party, he said, leading to instability.
Studies show that a smaller independence from central banks generally leads to greater inflation.
This does not mean that presidents have not tried to influence the Fed in the past, or that its officials are impermeable to the political context, adds William Clark. “Any executive or bureaucratic organization can only be partially independent, since its members are aware that this independence is given to them and can be withdrawn,” explains the co -author of a study on the question, published ten years ago.
But she remains “jealously guarded”, he says, the members of the Fed being aware of the dangers of a loss of confidence.
Alarm
Since the arrival of Donald Trump, economists ring the alarm on the impacts of his decisions, whether on customs or other rights. However, the American economy is not in debacle, despite the upheavals. Does this mean that Trump challenges forecasts?
“He often changes his idea, so I think we see now that investors are waiting for,” says Clark.
Different simultaneous factors – notably boom in artificial intelligence and environmental deregulation, favorable to certain industries – make assessments complex, notes Mr. Drechsel.
“What we know other experiences is that when you reach a rocking point, it can tumble up quickly,” he adds.
