Trump wants to revamp the Fed. Here’s what that could mean for Americans

Trump wants to revamp the Fed.

US President Donald Trump made the move to remove Federal Reserve governor Lisa Cook, testing whether a president has the ability to remove members of the central bank on their own. Unlike Cabinet members, Fed leaders are not expected to be political and can be dismissed only "for cause," i.e., wrongdoing. Courts have always affirmed that the Fed occupies a special position in government and that independence is essential to economic stability in the long run. Cook, a Black woman and the first on the board, has indicated she won't resign and will take it to court, the Washington Post reported.

Trump's quest for control

Trump is trying to establish a majority on the Fed's seven-member board by installing empty seats and trying to oust Cook. Trump has already nominated close associates, and the worry is that the president could also sway board choices as well as heads of the regional banks. Trump-appointed positions dominating the Fed may make the field tilt towards political demands for rapid rate cuts rather than careful data-driven policy.

Interest rates in the crosshairs

Trump has always called for slashing interest rates as much as three percentage points to lower the cost of borrowing and spur growth. If he gets his way, his clamour may easily lower the Fed's benchmark federal funds rate, cutting the interest rates on credit cards, car loans, and some student loans. Lower short-term rates would also lower returns to savers, with money market funds and savings accounts paying less.

Why mortgages may rise instead of fall

Mortgage rates are indirectly set by the Fed but are tied to long-term Treasuries. If investors think that Fed independence is being eroded, they might lose confidence in U.S. debt, sell Treasurys, and hunt for better yields. That would drive up mortgage rates even as the Fed reduces short-term borrowing costs. Economists point to late 2024 as an example when mortgage rates rose from 6 percent to more than 7 percent after the rate reduction by the Fed, as investors became apprehensive about inflation.

The danger of inflation

Cutting rates too aggressively risks causing inflation. Lower-cost borrowing encourages consumers and businesses to borrow and spend more, pushing prices throughout the economy. Economists warn that it is a natural pattern in countries where central banks are not independent. If the Fed falls into politics, America can face chronic inflation that destabilizes household budgets and erodes purchasing power.

Why independence matters

Central bank independence is one of the support pillars of the modern economies. It allows policymakers to make unpopular but crucial decisions, as happened when exceptional measures were taken during the financial crisis of 2008. Fed Chairman Jerome Powell stressed that monetary policy independence from politics ensures decisions are data-driven and not influenced by election-year interests. Economists say even a perception of political interference can upset investor confidence and lead to higher long-term rates and lower growth.

What's on the line

For regular Americans, the stakes are real: cheaper products and mortgage rates now but more expensive mortgages and inflation later. For the US economy, it's whether four decades of Fed independence will be superseded by a politicized central bank, keeping markets off balance and families exposed to greater volatility.