New challenges for the independence of the Fed
29 AUG, 2025
By Tiffany Wilding from PIMCO
Firstly, a few words about the speech of the Federal Reserve Chairman, Jerome Powell, at last week's Jackson Hole symposium. His comments have not changed our baseline outlook: We expect a series of gradual interest rate cuts, likely starting with a 25 basis point cut in September, to bring the federal funds rate back to a neutral range (between 3.0% and 3.5%), probably before Powell's term as Fed chairman ends in May 2026. In his speech, Powell cited the growing downside risks to employment and the transitory nature of the effects of tariffs as reasons why policy "might" need an adjustment, the clearest signal he could give that the Fed intends to announce a 25 basis point rate cut in September without prior commitment. However, he also emphasized that the return to neutrality, at least for the time he has left as chairman, will likely be gradual and will depend on whether inflationary pressures turn out to be temporary.
Since then, Jackson Hole has been overshadowed: on Monday night, President Donald Trump announced the dismissal of Federal Reserve Governor Lisa Cook from her position "for cause." Cook quickly responded that "there is no cause under the law" and she will not resign. This event could have implications for the perception of the Fed's independence, although the potential impact on Fed policy (and interest rates) is far from clear.
The presidential authority to dismiss Fed governors
Earlier this year, the Supreme Court affirmed the special status of the Federal Reserve as a quasi-private institution, whose governors can only be dismissed "for cause," a threshold usually reserved for serious offenses, such as fraud. That ruling helped to alleviate concerns about the erosion of the Fed's independence, after Trump threatened to dismiss Fed Chairman Powell earlier this year.
Trump's new statement reopens these issues. He cited as sufficient cause Cook's alleged false statements about the 2021 mortgage agreements raised in a criminal complaint by Bill Pulte, director of the Federal Housing Finance Agency. However, Cook denies the allegations.
Implications for Fed staff and policy
In our opinion, this issue goes far beyond Cook. The accusations have political connotations, given the public pressure campaign that Trump has been carrying out for a year to lower interest rates.
Although replacing Cook would not directly change the majority of votes of the Federal Open Market Committee (FOMC), his position is important because it could change the majority of votes of the Board of Governors on issues such as the appointment of the presidents of the Reserve banks.
Each regional board of the Reserve Bank nominates a president for a five-year term, but the final approval falls on the Board of Governors of the Fed. The Board renews the appointment of all presidents at the end of February every five years (the years ending in "1" or "6") in what is usually a procedural vote.
When the renewal is voted again in February 2026, a majority of the Board favorable to Trump could, at least in theory, veto or reshape the direction of the regional banks for the next five years. Five presidents of regional Reserve banks are also voting members of the FOMC, with one-year terms by rotation (except the president of the New York Fed, whose position is permanent), so political changes in their list could affect policy decisions over time.
There is no precedent for any of this, but some jurists also argue that a majority of four members of the Federal Reserve Board of Governors could remove the presidents of the regional banks outside the normal five-year re-election cycle, although they would have to justify the reason for the dismissal.
Uncharted territory
Taking a step back, all of this is uncharted territory. It is likely that Cook's dismissal will be the subject of litigation and will take time to process in the courts. If Cook does not obtain a court order against the president's decision, the position could remain vacant while the case is processed in the courts.
Even if the courts confirm Cook's dismissal for just cause, the Senate's confirmation of the people who will fill the vacant governor positions remains uncertain, despite the Republican majority.
Key Republican senators have quietly communicated their refusal to appoint a partisan Fed chairman, and we could extrapolate this to the Fed board in general. The renewed attention on the Fed could make it difficult for the Senate (and the Senate Banking Committee) to confirm a Fed candidate who seems too political, too partisan, or too moderate. Any confirmation process can be difficult and lengthy, which could lead to a prolonged period of vacancies on the Fed's board of governors.
There is also uncertainty around what individual board governors (even if they are appointed by Trump and confirmed by the Senate) would do once they face the issue of re-election of regional bank presidents. According to Bloomberg reporting from a Freedom of Information Act request, current Fed governors Christopher Waller and Michelle Bowman abstained from voting on the 2022 appointment of the Chicago Fed president, Austan Goolsbee (who was still approved by majority), but abstaining has far fewer consequences than altering decades of precedent and voting to remove a sitting bank president.
Implications for rates and markets: more uncertainty and risk premium
Trump's criticisms of Fed officials this year have focused on their refusal to lower interest rates. However, changing decades of Federal Reserve norms to lower the official rate between 150 and 175 basis points, as several Trump Administration officials have advocated, may not reduce long-term bond yields.
Although the market's reaction to the news has been relatively moderate so far, greater uncertainty, higher forward premiums and steeper yield curves resulting from the perception of the erosion of the Fed's independence, regardless of what it actually does, could counteract this situation. A weaker US dollar, with inflationary implications, could also be problematic for the nominal yields of longer-term bonds. The equilibrium inflation rates of US inflation-protected Treasury securities (TIPS) are currently pricing in relatively benign prospects, with limited long-term inflationary risks, but that could change.
We continue to believe that the likelihood of the FOMC making severe and rapid rate cuts is very low, given the institutional structures that remain in place and the time necessary to litigate what would be unprecedented measures. In fact, there are still numerous reasons to be calm about the independence of the Fed. However, even though the risks seem low, the new strategy of the Trump Administration deserves the attention of investors.
Although each of the potential Fed candidates may seem reasonable separately, the possibility of a block of four members being willing to exercise their veto right over the presidents of the Reserve banks introduces greater uncertainty in a turbulent situation for monetary policy and the economy in general, something that investors will eventually have to face when considering the allocation and diversification decisions of their portfolios”
