Waylon Wong (2:48)

So here is the state of play as of Tuesday afternoon, the director of the Federal Housing Finance Agency has accused Lisa Cook of falsifying bank documents and property records when she purchased two properties in 2021. The agency head says she listed both as her primary residences, which potentially gave her more favorable terms from the bank.

Darian Woods (3:08)

Yeah. So this allegation is what the President cited. On Monday, Lisa Cook responded with a statement saying no cause for firing existed and she wouldn't resign.

Waylon Wong (3:18)

And, you know, we've never really faced a situation like this in the US Before. And we are going to chat about what the next few weeks and months could look like. But first, we have to go how he got here.

Darian Woods (3:29)

How did we get here? So this is the first time we've really seen the President fire a Fed governor. We have seen the Department of Justice under Trump investigating other officials for allegedly the same type of mortgage fraud, namely New York Attorney General Letitia James and California Senator Adam Schiff. So scrutinizing mortgage applications seems to be a new tool for the Trump administration against political opponents. The Guardian newspaper is calling it lawfare.

Waylon Wong (3:59)

There have been some famous clashes between presidents and their Fed chairs. So this happened under both Lyndon B. Johnson and Richard Nixon. The closest we've come to the President actually pushing out a Fed official happened in 1951 during the Truman administration. So the president disagreed with then fed chair Thomas McCabe over interest rate policy and how to finance the Korean War. McCabe ended up resigning, and that's a move that commentators now describe as an effective firing.

Darian Woods (4:27)

And so what's fascinating about that episode is that before McCabe left the Fed, he helped broker something called the Treasury Fed Accord. And that's an agreement that established the norms of Fed independence that the bank and the government have relied on since then.

Waylon Wong (4:42)

Now, of course, there are norms, and then there is the law. So if you look at the text of the Federal Reserve act, it says that members of the Board of Governors serve for 14 years unless removed from for cause by the President. And for cause is generally interpreted to mean something like negligence or malfeasance.

Darian Woods (5:02)

And we've covered on the show how the Fed is one of many agencies that has historically gotten this kind of legal protection. The Federal Trade Commission is another one. And the basic idea is that the President can't fire agency officials on a political whim. There has to be cause.

Waylon Wong (5:18)

Right? And this legal precedent is called Humphrey's Executor. It comes from a 1935 Supreme Court case, and then it resurfaced this this year because the Trump administration fired Democratic members of the National Labor Relations Board and the ftc. One of those cases went up the chain to the Supreme Court. And then in May, the Supreme Court ruled that the President can fire agency heads, at least temporarily. But importantly, it had this line in the Opinion that kind of said the Fed is special. So legal experts took this as the Supreme Court saying, yes, the President can fire agency heads, but not at the Fed.

Darian Woods (5:57)

So there's a potential carve out here for the Fed for reasons, reasons, maybe economic expediency. And I expect this will all get fiercely debated in the courts. Which brings us to the present. Today, Lisa Cook's lawyer said they will sue Donald Trump's administration. Her lawyer says that his attempt to fire her based solely on a referral letter lacks any factual or legal basis. Also, the Congressional Black Caucus released a statement saying, quote, this is a racist, misogynistic and unlawful attempt on the integrity and independence of the Federal Reserve. Meanwhile, Commerce Secretary Howard Lutnick told CNBC the real question should be, did she commit mortgage fraud?

Waylon Wong (6:38)

And then in terms of the markets, it was actually kind of a calm day. We saw a slight softening of the dollar, some selling of long term bonds, but no, like big financial earthquake.

Darian Woods (6:48)

And I think part of that, Weylan, was because the future is very hard to predict. And as for what's on the horizon, we are now in a much more politicized, antagonistic era for the right because.

Waylon Wong (7:01)

First there is the legal fight. This is likely to go to the Supreme Court, who will decide if the allegation of mortgage fraud is indeed caused to remove Lisa Cook or if it isn't, whether the President can fire a governor of the Fed without cause. So this will be a real test for a Supreme Court that has mostly sided with the President this year.

Darian Woods (7:20)

And as the legal fight plays out, it's not entirely clear whether the Federal Reserve keeps Lisa Cook on as an official. Today, the Fed released a statement that kind of split the difference. It said it would abide by any court decision.

Waylon Wong (7:36)

Obviously, we will be watching this closely, especially because the Fed meets on interest rates in mid September and Lisa Cook was set to vote in that meeting.

Darian Woods (7:45)

Now, I want to broaden the discussion we're having here to the broader political play that this represents for Donald Trump. It's clear he's trying to make as many nominations as he can to the Fed and kind of politicize it in the way that the Supreme Court has become politicized. So why don't we go through the math?

Waylon Wong (8:03)

Yeah, so there are 12 voting members of the Federal Open Market Committee. Seven of them are on the Board of Governors and they are presidential appointees.

Darian Woods (8:13)

And if Lisa Cook does leave, the President will have a majority of the appointees on the seven member board. But remember, there is five other voting members of the broader committee.

Waylon Wong (8:24)

Yeah, and for these five members, the president does not get to appoint them. They are regional Fed presidents. So if Trump wants to stack the Fed with loyalists, then he has to get creed.

Darian Woods (8:34)

Yes, I read this report yesterday about how the next cohort of regional Fed presidents will come up for appointment early next year. This report said that the seven member board that Lisa cooks on, that's who approves the regional Fed presidents. So Trump could pressure his governor appointees to veto regional presidents who aren't aboard the Trump train. And failing that, the board of governors can fire regional presidents at will, according to a Justice Department opinion.

Waylon Wong (9:03)

Basically, this comes down to what we've been talking about. The Fed's insulation from politics doesn't have strong legal protections. Like it's not like enshrined in this particular way. And with enough perseverance and norm breaking, the president could shape the Fed in his image, which again, we've never seen before.

Darian Woods (9:19)

We've never seen before in the US And I want to say that the evidence is really strong that when politicians have power over interest rates, inflation tends to go up. You see this around the world Turkey springs to mind as an example recently where the president hired and fired central bank chiefs based on their loyalty. They had inflation over 80% back in 2022. So in my humble opinion, Donald Trump is really playing with fire here.

Waylon Wong (9:49)

This episode was produced by Corey Bridges and engineered by Robert Rodriguez. It was fact checked by Sarah Juarez. Kate Kincannon edits the show and the indicator is a production of NPR Foreign.

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