Blocking Lisa Cook’s Removal: A Bipartisan Concern
There’s a bipartisan group that, in the economic realm, has expressed strong opposition to President Trump’s potential removal of Governor Lisa Cook. Their amicus briefs, submitted last week, emphasize one key point: Political interference in the Federal Reserve must be avoided. Such interference could disturb inflation expectations, undermine reliability, and ultimately destabilize the economy.
This coalition is quite comprehensive, featuring notable figures including all living former Fed chairs—Greenspan, Bernanke, and Yellen—along with several former Treasury Secretaries, a Veterans Council of Economic Advisors, and scholars from prestigious institutions. Their legal filing, crafted by Covington & Burling—an organization that Trump has previously criticized—aims to carry considerable weight.
However, the debate becomes quite complicated. At the core, there are two related issues under discussion. The first, which is well-established, concerns the structural independence of the central bank. Politicians often favor easier monetary policies to help reduce borrowing costs, spur economic growth, and manage deficit spending.
Yet, the second claim raises eyebrows. Some economists assert that even a perceived decline in independence could negatively impact inflation expectations. However, the brief doesn’t provide solid evidence or much reasoning to support this, relying instead on longstanding academic discussions. The fear seems to be that if a member of the Federal Open Market Committee (FOMC) is dismissed, it could disrupt financial markets, but it’s uncertain how much credibility this holds.
Inflation Expectations Remain Resilient
Interestingly, short-term concerns might spark some alarm. During a period of significant inflation, which has been the worst in decades, long-term inflation expectations have stayed around 2%. So, if expectations remain stable, why would removing Cook, who holds a crucial vote, cause instability, especially when the Fed maintained low interest rates during a time when the Biden administration implemented substantial economic stimulus for recovery?
The notion that inflation expectations are fragile might be overly simplistic. They’ve already weathered significant disruptions—a pandemic, a war, and soaring inflation. Yet, the briefs imply that the public or investors might panic if Cook is removed. This paints a contradictory picture: the market can manage through economic chaos but is so easily swayed by political shifts.
This argument would carry more weight if Trump had pushed for a broader ability to manipulate central banking decisions. However, he’s acknowledged that removals should occur only for valid reasons. Why then should the removal of a single governor cause individuals to mistrust the Fed’s independence?
Moreover, the “perception” argument seems one-sided. Cook has faced serious accusations related to her role, and her tenure could actually damage the Fed’s credibility further. While the brief assumes that her removal is damaging, it overlooks the potential risks of allowing questionable leadership to continue. Both scenarios present challenges.
Another point worth noting is that the argument overlooks a significant issue: the Fed’s credibility may be more at risk due to a lack of accountability resulting from management decisions during the Biden administration. There hasn’t been notable accountability for the Fed’s oversight amid the worst inflation in a generation. It might be that maintaining leadership amidst such failures poses a larger threat to inflation expectations than the removal of a single member.
Challenging the Inflation Expectation Theory
There are also shortcomings when it comes to supporting evidence. The Amici heavily favor the idea that inflation expectations significantly influence actual inflation. Though prominent in certain economic circles, the supporting evidence is weak. Even within the Fed, skepticism is present. A 2021 paper by economist Jeremy Rudd questioned the assumption that inflation expectations affect inflation directly, suggesting instead that the premise has shaky foundations.
Rudd notes that many economic models may inaccurately assume that expectations drive inflation. Instead, research frequently reveals that past inflation rates are more predictive of future trends. Despite extensive data and market observations, it appears that recent experiences with inflation are actually more significant than prevailing expectations.
Surprisingly, Rudd highlights that inflation trends may stabilize over the long term, even when short-term data fluctuates. For instance, during the 2010s, inflation did not spike, despite a prolonged period of low target rates. Similarly, in the late 1970s, inflation didn’t ease despite public calls for it to. As even the Amici have recognized, expectations were steady through inflation spikes in 2021-2022. Thus, the relationship between public expectation and reality in terms of inflation is far more tenuous than it may initially appear.
The Fed’s Independence Beyond Individual Actions
This isn’t to downplay the importance of maintaining independence. It absolutely matters. Congress has intentionally structured the roles and protections to insulate monetary policy from electoral pressures. Preserving structural independence is crucial. However, suggesting that the potential removal of one individual could drastically shake the foundations of U.S. monetary reliability seems overstated.
By amplifying their claims, the Amici may weaken their overall argument. They risk presenting as a fearful chorus warning against a minor change. A more straightforward approach—that the Fed’s independence is safeguarded by law and should not be casually undermined—might be more effective.
If the Supreme Court decides to allow Lisa Cook’s removal, it’s unlikely that the market will crash. The expectation of inflation will not spiral out of control, nor will the dollar collapse. However, the real danger seems to lie in portraying the Fed’s legitimacy as so fragile that it can’t handle the removal of one of its members.
