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A
If bonds are back today, why wait for tomorrow? At pjum, our fixed income strategies help investors uncover hidden value and unlock opportunities. Whether you're looking to enhance your income or diversify your portfolio, our broad range of strategies bring together local expertise and deep credit research to help you achieve your long term goals. PJUM our investments shape tomorrow today. Pushkin, listeners, this is not a drill. That man, Donald Trump has been hammering away at the Federal Reserve for months, trying and failing to get rid of the chairman and succeeding in nominating a loyalist to a role at the world's most important central bank. Well, now he has upped the ante a lot, claiming that he has fired Fed Governor Lisa Cook, effective immediately. Can he do that? She doesn't think so and nor does her lawyer. But the direction of travel here is becoming incredibly clear. He wants control of this institution one way or another. This is an incredibly serious attack on an incredibly serious institution. Not that markets appear to care too much. For now, today on the show, we're going to ask, can you really do this? What happens next? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, where it's finally raining ages. And listeners, I have a special guest on the show today. Yes, it's a full Scouse takeover of the Unhedged pod. It's Claire Jones who covers the Fed for us in Washington, D.C. you're right, Taylor, I caught you there.
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B
I'm good or I'm boss. As I should say, this is going.
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To confuse the hell out of our American listeners.
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B
I know boss is kind of great, but in Scouse.
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A
Just bear with us. Claire, thank you for doing this. You have been fully beaten up by news these past few days. What a time to be a Fed reporter. Like, how on earth? How are you dealing with this?
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B
Oh, God, absolutely. Yeah. I've written about central banks for 18 years. There's been some dramatic times with financial crises of one stripe or another. But, you know, the scale of these attacks of what's really the most important central bank in the world is really quite something.
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A
It is really something. Okay, so the main character in this whole thing, apart from Donald Trump, is Lisa Cook. Now, listeners might not be familiar with who she is. Who is Lisa Cook?
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B
So Lisa Cook is one of the seven governors who sits at the Federal Reserve's board in Washington. Before she joined the Fed, she was an academic. She was nominated by the Biden administration in 2022 and then approved by the Senate. Since joining the Fed, she's kind of stuck with the consensus and, you know, was seen as, you know, someone who would tend to vote with Powell.
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A
So that's the Fed chairman, Jay Powell. She normally agrees with him on stuff, basically.
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B
Yeah. Her appointment was also seen as significant at time and heralded at the time because she's the first black woman to sit on the board of governors of the Fed.
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A
That's exactly the point I was about to make. It's very rare to see black women in these sorts of positions. And so there was basically someone who is very sympathetic to Trump, launched a set of allegations against her. Was it. Was it last week or the week before? It was very recent anyway. And so there's a series of allegations been made against her.
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B
Exactly. So early last week, there was. There was a series of posts on X by Bill Pulte. Now, Bill Pulte is the director of Federal Housing under Trump. He's also been an arch critic of the Federal Reserve. He's one of the people who's been very aggressive in attacking Fed Chair Jay Powell. He's called for him to resign on several occasions. He's been very involved in the attacks from the Trump administration about the Fed's renovation, which the Trump administration accuses of being ostentatious and so on. So there's a bit of backstory with this guy of him being quite a big Fed critic.
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A
Bit of a Fed botherer. Yeah.
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B
So what we saw last week were a series of social media posts, the thrust of which was a letter that Pulte had sent to the Department of Justice saying that he'd found evidence that Lisa Cook had committed mortgage fraud. Now, the allegations and the claims that he makes center on the purchase of two properties which took place before Cook joined the Fed. They were in 2021. Now, he alleged that she bought a property in Michigan and said that would be her primary residence, and then alleged that a few weeks later, she bought a property in Atlanta and also said that that was going to be a primary residence, too. And by doing that, committed mortgage fraud, he claims, and under that kind of got a more favorable rate from the bank for the mortgage. So that happened last week. Cook, more or less immediately, the same day, kind of came out and said, you know, she refused to resign and said she was gathering together the paperwork and would answer sensible questions on the allegations in due course. That was heading into Jackson Hole. So it was a very kind of tempestuous environment in which central banks really traveled to the Grand Tetons for this, you know, what's usually been their kind of like crown and glory. This very well known, this very well regarded academic symposium.
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Jackson Hole is like one of these things that people in, in markets and around markets know very well. It's like this annual get together that the world's most important central banks, they get together, like in the mountains, in the wild, like kind of away day for the world's most important central bankers policymakers. They get together and talk about kind of common challenges and this and that and. And yeah, it's a set piece thing. It happens. It happens every year. But this year it took place, as you say, against these allegations that have been made against Cook that she was refuting. And it set like quite a weird tone for the whole event. Right?
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B
Yeah, no, absolutely. I mean, there was, there was the academic discussion and then there was this undercurrent of the pressure the Fed was under. I mean, this isn't just a US thing. People are traveling from all over the world to Jackson Hole for this conference. It's very presidious. It's held in very high regard. And, you know, the sense from not only from US central bankers, from central bankers anywhere was one of like, extreme concern. This is the most important central bank in the world, one of the most important institutions in the entire global financial system, coming under these sorts of attacks, which are more readily associated with kind of central banks in emerging markets where you've got, you know, dictators running the country.
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A
It's absolutely wild stuff. So Jackson Hole happened. Powell made his, you know, very thoughtful remarks, saying, look, the jobs market's looking a little bit wobbly. We're still a little bit worried that inflation could kick higher. But all things equal, are minded to read the signals from the employment side of that and, you know, hinting that interest rate cuts might be coming in in the coming months. But then kaboom, like out of nowhere, Trump put something on social media saying, I fired Lisa Cook. Like what?
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B
Yeah, I mean, that's the irony of some of this too, is that since he returned to the White House and, you know, during his first term too, Trump has always wanted the Fed to cut interest rates.
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A
Yeah, hard.
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B
Now we're now at a point where that's likely to happen. Yes, but that hasn't stopped the attack. So I think people knew Cook was under pressure, that at some point, you know, she was going to have to answer these allegations. The Department of Justice said they were taking the evidence presented by Pulte very seriously, but no one knew it would happen so fast. And that Come Monday night, Trump would say he was going to sack her with immediate effect. Now, we warned last week that if Jay Powell didn't fire her, that he was going to, but there was a sense in which people thought, you know, there would have to be an investigation, that there have to be evidence produced, that the case would have to be presented to Coke, that she'd be able to kind of mount a defense to. But none of that's happened yet. And I think that is another worrisome element of this, that there's been no due process, that this post on Truth Social has just kind of came out of nowhere in a way.
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A
It did come out of nowhere. And you were obviously burning the midnight oil writing about this for us. What was that process like? You know, people that you were speaking to, were they saying, oh, well, I guess this was gonna happen inevitably, you know, at some point, or were they saying, holy moly, this has got out of hand?
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B
Yeah, I think the latter. I mean, I think this took people, you know, even those involved really aback. I mean, there was the sense in which the rhetoric had been very aggressive, but it's very hard to fire a member of the Fed's Board of Governors. There's a whole body of US Law that protects Federal Reserve officials from being fired. The bar to fire them is really, really quite high. So I think there was the sense that Trump was really gonna have to prove that the case against Cook was very, very strong before saying what he did last night, which was that he wanted to fire her before the case against her has really occurred.
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A
It strikes me that all the kind of, you know, academics and the usual commentators and observers that we've spoken to are all saying, nope, he just can't do this. This is not a thing that's in his gift to do. So I think the minutiae of what she's been accused of doing or not doing and the minutiae of the kind of protections that the Fed have got are almost beside the point. The point is it's really clear what he wants to do here. He's seen an institution that he doesn't directly control and that isn't doing exactly what he wants. And he appears to be saying, yeah, this won't stand. I want what I want, and I'm determined to get it. Is that a reasonable interpretation?
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B
So I think there are a few points here. I think one of them is that Fed officials can be fired for what's referred to as for cause. Now, what4cause is usually interpreted as is gross malfeasance now there's hardly any case law on this. So we really don't know whether or not in Cook's case, what she's guilty of is gross malfeasance. That's still very much open to debate. And that really has to go through the US's legal system. So there's that element where, you know, there are questions to be answered on Cook's side. But there's also a sense in which this isn't an isolated incident. We're not at a point where, you know, the administration is found this evidence and said, you know, we're gonna, you know, prosecute Cook. You know, we're in a world where Trump has made it his priority in his second term to attack the Fed. I mean, not even just attack the Fed, attack the economics establishment. We've seen him fire the head of the Bureau of Labor Statistics. We've seen him attack universities, including their economics departments, and we've seen him attack the central bank, too. And, okay, Cook's got questions to answer. But there's also issues about the Fed's renovation where they've kind of attacked it on those grounds. There's been a litany of avenues which the administration has used to undermine the credibility and trust placed in the US central bank.
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Because for investors and for companies and for kind of everybody else, really, it's really important that central banks determine what interest rates are going to be based on the economic evidence they have in front of them and not based on what governments want them to do. This is kind of, okay, you can debate around the edges here, but it's certainly been the mantra for the past couple of decades that it's much better to leave monetary policy, leave it to the experts, leave it to the independent people in the financial system, so that you don't end up with people getting swayed into raising or cutting interest rates or doing any other kind of monetary shenanigans just to suit a political agenda. So, as you say, there's a huge debate about whether he can do this and so on and so forth. But it's useful to think about what's at stake here. So Paul Krugman, a big deal economist, he writes a substack. Now, he was saying earlier on today, if Powell caves cast or the Supreme Court acts supine again and validates Trump's illegal declaration, the implications will be profound and disastrous. The US will be well on its way to becoming Turkey, where an authoritarian ruler imposed his crackpot economics on the central bank. And the damage will be felt far beyond the Fed. He says the real message here is, if you get in our way, we will ruin your life. Which is, you know, pretty plain speaking, but seems reasonably accurate here. It just means that the bar to disagreeing with Trump about anything becomes really quite high because you'll just get buried in legal process and buried in allegations. That's the danger, right, for all federal employees.
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B
Yeah, no, absolutely. And I think what you say about central bank credibility and the kind of comparison with Turkey and so on is really important here. I mean, Trump wants the Fed to cut interest rates really aggressively for two reasons. One is because he says, you know, it will power growth, which kind of fits in with the normal kind of, like, economic framework. And then he's got this other argument that the US Is paying too much to borrow and the Fed is producing higher government borrowing costs for his government because they won't cut interest rates. Now, the issue is that if you attack the Fed to the point where it loses credibility, then you risk the opposite. I mean, if you look at the borrowing costs of emerging market economies such as Turkey, they're a lot, lot higher than the U.S. so Trump really risks having the opposite of the consequence he wants here. Where he thinks by attacking the Fed, he'll get lower interest rates. Well, he might in the short term, but in the longer term, there's going to be hell to peg.
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A
Yeah. I think that's why what we're seeing, like, markets are not freaking out about this Cook news as much as I honestly thought they would. But what we are seeing is that short term government bonds are gaining in price, which is the market's way of saying, we do think that interest rate cuts are coming pretty soon, but long term interest rates, long term borrowing costs are rising. And that is exactly to your point, the market's way of saying, over the long run, we think there might be enough political interference in what the Fed does to mean that interest rates are held artificially low for too long and that inflation takes root. So, as you say, he might not get what he wants here. Probably the best thing for him to do in terms of achieving the results that he wants is just to leave the institution alone. But. But he appears to be incapable of doing that.
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Yeah, well, quite.
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So what's your hunch? What are you, I mean, what are you looking out for over the next few days in terms of how you're going to be reporting this out from, from D.C. what do you think are going to be the next steps on the part of the Fed and on the part of the Trump administration? Like, does does the Fed put out some sort of stronger statement of support for Cook? Is it able to do that without seeing these allegations play out?
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B
I think that's a very good question. I mean, with the administration, it's very hard to tell, but we clearly need to keep a close eye on what the Department of Justice is saying. It will be interesting to see how much the Fed kind of supports Cook. She has taken independent legal counsel, which is what you do in a matter of this nature. So there's nothing necessarily untoward there, but we anticipate what that legal counsel is going to do is file. I think it's called an injunction at the local district court, which would basically, if it was successful, enable Cook to return to work and serve on the Fed while the legal proceedings are ongoing. We'd expected to get that just because there's been quite a lot of senior federal employees who've been fired under Trump and a few of them have pursued this avenue and the federal district court has kind of ruled in their favor. So that would mean that Cook could remain at the Fed and continue to work at the Fed until a judgment as to whether or not she could be fired for cause has kind of ran through the US Courts. And there's a high chance here that it looks as though it'll end up in the Supreme Court and really be very, a very, very interesting, historically unprecedented case as to just how much power the executive branch in the US Has. Oh, sorry. Just. I think they're testing the fire alarm.
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Okay, listeners, what you hopefully can't hear at the moment is that a huge alarm has just gone off where Claire was speaking to me. So hopefully she is obeying this alarm and leaving the building. So we're going to be back in a second with long shorts, which might be just me.
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Going back to the Depression and World War II and Pearl Harbor. And there's always a reason to sell. And yet somehow we all have to get up each day, send the kids off to school, dress and feed ourselves, go do our thing in the US that's 20, 25 trillion dollars worth of activity plus other expenditures we have. It takes a lot to derail the economy. To learn more about the long term.
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Investing Principles, subscribe to PJIM's the Outthinking Investor in your favorite podcast app. Okey doke. We're back with. Well, I'm back with Long Short, that part of the show where I go longer thing I love or shorter thing I hate. Listeners, please don't worry. Clare Jones is totally fine. It's just some sort of alarm going off in her building. But for the sake of long, short, I will be long analysis, decency, the rule of law, all that sort of thing. You know, we're gonna really miss it when all that stuff is gone from markets. So we are heading off for now. We're going to be back in your ears on Thursday and in the meantime, remain good, upstanding citizens. Please. Thanks very much. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher forges is the FT's acting co head of Audio. Special thanks to Laura Clark, Alasdair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening. Sam.