United States President Donald Trump has said he will fire Federal Reserve Governor Lisa Cook over unproven claims of mortgage fraud, an unprecedented step which could test the boundaries of presidential power over the central bank’s independence.

In a letter posted on social media on Monday, Trump told Cook he has “sufficient cause to remove you from your position”. Trump claims that Cook misleadingly indicated that she intended to live in two homes as her primary residence in 2021.

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Cook, appointed to the Federal Reserve (or Fed) board in 2022 by former President Joe Biden, has yet to provide a detailed account of the transactions since the matter was raised by the Federal Housing Finance Agency last week.

Trump’s letter, which has escalated his fight to control the Fed, spooked financial markets. Both the US dollar and long-dated treasuries fell on Tuesday. The president has made little secret of his desire for the US central bank to spur growth by lowering interest rates.

So, why is Trump intensifying his attacks on the Fed, and how will it affect the independence of the central bank?

What has Trump said against the Fed governor?

In the letter, Trump said Cook had falsified her bank records to obtain favourable mortgage terms before joining the Fed. He accused her of “deceitful and criminal conduct in a financial matter” and said he did not have confidence in her “integrity”.

“At a minimum, the conduct at issue exhibits the sort of negligence in financial transactions that calls into question your competence and trustworthiness as a financial regulator,” he added, claiming authority to dismiss Cook under Article 2 of the US Constitution.

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Last Friday, Trump threatened to fire Cook – a former professor of economics at Michigan State University and the first African American woman to serve on the Fed board – if she did not resign.

But Cook has been defiant about staying on: “I have no intention of being bullied to step down from my position because of some questions raised in a tweet,” Cook said in a statement on August 20.

“I do intend to take any questions about my financial history seriously as a member of the Federal Reserve, and so I am gathering the accurate information to answer any legitimate questions and provide the facts,” she said.

Trump’s latest salvo comes amid repeated attacks on the Fed’s chair, Jerome Powell, for not cutting the interest rate fast enough. Trump has even threatened to fire Powell, who has previously warned that the president’s trade tariffs will push up prices for US consumers.

Does Trump’s latest move constitute an attack on the integrity of the Fed?

While the employment terms of Fed governors are designed to outlast the tenure of any particular president, the Federal Reserve Act does allow for the removal of a sitting governor “for cause”. Cook’s term is currently set to last until 2038.

The forceful removal of a governor has never been tested by US presidents who, particularly since the 1970s, have taken a “hands-off” approach to Fed matters as a way to ensure confidence in US monetary policy.

The ability of the Fed to set interest rates, which affect the cost of borrowing for consumers and businesses, without being subject to interference from Washington is widely considered a key tenet of trust in the US economy.

Before any decision on Cook’s future, financial market participants say Trump’s attack will raise questions about the future of the Fed, and whether or not it will become susceptible to ill-advised policy recommendations from the White House.

For Karsten Junius, chief economist at Bank J Safra Sarasin, “political interference will make monetary policy decisions less efficient and credible.” He told Al Jazeera that would “make it more difficult to fight inflation”.

Junius also noted that efforts by Washington to affect monetary policy would have a “negative effect on bond markets… It would create greater uncertainty and lead to higher long-term borrowing costs [for the US government].”

Bonds are essentially loans made by investors to the US government, to be repaid with interest over time. They have long been considered one of the safest assets in the world because the risk of Washington failing to repay its investors is very low – though Trump is changing that.

How is the Fed organised?

US monetary policy decisions are made by the Federal Open Market Committee (FOMC), consisting of seven members of the Board of Governors – appointed by the president – plus a rotating group of 5 presidents from the 12 regional banks.

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The president of the New York Fed has a permanent voting seat, reflecting the city’s financial clout. The other four voting seats rotate annually among the remaining 11 regional bank presidents, ensuring that different parts of the country have a voice in policy discussions.

This structure balances national oversight from Washington with regional input from across the US, aiming to create a monetary policy that reflects both national and regional economic realities and interests.

If Trump succeeds in removing Cook, it would give him an opportunity to secure a four-person majority on the Fed’s Board of Governors, helping him to exert more control over monetary policy – namely by lowering interest rates.

What will happen next?

In a hotly anticipated speech last Friday at the Fed’s annual economic summit in Jackson Hole, Wyoming, Powell sent his strongest signal yet that the Fed would soon begin to lower interest rates, stating that “balance of risks may warrant adjusting our policy stance.”

So far this year, the Fed has held interest rates steady in the 4.25-4.5 percent range, following a 1-point percentage cut in 2024. But Powell’s suggested policy pivot is aimed at preventing the US labour market from softening further.

Monthly jobs growth has slowed this summer, with the world’s largest economy adding just 73,000 jobs in July. From May to July, there were 106,000 new entrants in the labour market, marking a significant drop from the 380,000 added in the previous three months.

In response to the Bureau of Labor Statistics’ latest data release, Trump said on August 1: “Too Little, Too Late. Jerome ‘Too Late’ Powell is a disaster. DROP THE RATE! The good news is that Tariffs are bringing Billions of Dollars into the USA!”

Days later, he fired statistics commissioner Erika McEntarfer, accusing her agency of “faking” employment figures, raising fears over the integrity of official US data.

For his part, Powell has indicated that a sharp drop in rates is unlikely at the next FOMC meeting in September, due to lingering concerns about the inflationary effects of Trump’s tariff policies, which will raise import costs in the US.

The Fed chair now faces a tough balancing act in trying to achieve stable inflation and strengthen the labour market. That clash has led to a fierce debate among Fed governors about the best path forward for US monetary policy.

Two Trump-appointed policymakers, Michelle Bowman and Christopher Waller, split with Powell at the last FOMC meeting in July by supporting a quarter-point cut in interest rates. Instead, rates were kept steady.

For now, Powell faces an uphill battle to forge a consensus about how much to loosen monetary policy in his remaining meetings as chair – which expires next May.

Janius Karsten says, “I expect more of a Trump loyalist to replace Powell next year.”

He said that could “pose a risk to constructive discussions at the Fed. In the event Trump nominates an outsider, or a non-traditional central banker, then things could get bumpy. That may prove an experiment in monetary policy.”

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