For the first time in the Federal Reserve's century-long history: Trump attempts to remove a governor, will the September rate cut outlook change?

Source: Wallstreetcn

Original Title: Dramatic Changes Before the September Decision: Trump Makes a Historic Move, Federal Reserve Board Faces "Reshuffle"

Just weeks before the Federal Reserve is expected to make its first rate cut of the year, an unprecedented political storm is hitting this century-old central bank.

At the center of this storm is an action taken by Trump this week—he attempted to dismiss Federal Reserve Board member Lisa Cook on charges of mortgage fraud. This is the first time in the Federal Reserve's 111-year history that a sitting president has tried to remove a serving board member.

This week, Cook has filed a lawsuit to prevent her removal. After preliminary arguments concluded on Friday in the U.S. District Court for the District of Columbia, whether she remains in office and can vote at the September meeting remains uncertain.

This unprecedented move by Trump has complicated what the market had considered an almost certain rate cut in September.

Chairman Powell had previously hinted at a possible rate cut at the September 16-17 meeting to address a weakening labor market. Although the market generally expects the rate to be lowered by 25 basis points from the 4.25%-4.5% target range, the extent of support for this decision and how subsequent policies will evolve are now shrouded in uncertainty.

The outcome of this power struggle will directly determine the composition of the Federal Reserve Board, thereby affecting the policy balance for the coming months and possibly longer.

1. Federal Reserve Board Faces Restructuring

The key to this personnel battle lies in its direct impact on the power balance within the Federal Reserve Board.

U.S. interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven Washington-based Federal Reserve Board members and five rotating regional Fed presidents. Among them, the seven board members nominated by the president and confirmed by the Senate form the core of power.

Currently, aside from Powell, the Board includes three officials appointed by the Biden administration (including Cook, who usually votes in line with Powell), and two board members appointed by Trump during his first term. The latter two both voted in favor of a rate cut at the July meeting.

If the court rules that Cook can be dismissed, her absence could result in a three-to-three split between Trump appointees and Biden appointees (including Powell) on the Board.

Furthermore, according to reports, Trump has told advisers that if Cook is removed, he will quickly nominate a successor, which could give his appointees a four-to-three majority on the Board.

Meanwhile, Trump has nominated his close adviser Stephen Miran to fill a vacant seat on the Board. Miran also supports rate cuts, and his Senate Banking Committee confirmation hearing is scheduled for next Thursday.

If he is swiftly confirmed by the Senate, he may be able to participate in the September meeting. At that point, there would be at least three board members aligned with Trump, strongly supporting the president's call for rate cuts.

2. Divergence on Rate Path Intensifies

Although there is a certain consensus within the FOMC to cut rates by at least 25 basis points, internal divisions remain significant, and dissent may become the norm.

On one hand, hawkish views persist. Kansas City Fed President Jeffrey Schmid said earlier this month, "Inflation remains too high, so policy should remain moderately restrictive."

On the other hand, some officials appointed by Trump may be more aggressive. Some analysts expect board members Bowman or Waller to push for a 50 basis point cut. For example, Waller said in a speech on Thursday that if the U.S. economy weakens significantly, he would support a 25 basis point cut.

Deutsche Bank Chief U.S. Economist Matthew Luzzetti said:

"If this situation continues, we will see quite frequent dissenting votes, and I would not be surprised by that."

And high-profile dissenting votes may confuse investors trying to gauge the future direction of interest rates: Will it be Powell, or the growing Trump camp, that controls monetary policy?

3. Powell Seeks Consensus Under Pressure

Amid political pressure from the White House and Cook's legal case, Powell is under tremendous strain.

Evercore ISI Vice Chairman Krishna Guha said:

"Powell will strive to ensure that the upcoming meeting is as unaffected as possible by various institutional pressures and issues within the Federal Reserve."

The core basis for Powell's policy adjustments is changes in economic data. Until July, most Fed officials remained hesitant about cutting rates, fearing that White House policies on tariffs, immigration, and other issues could reignite inflation.

However, at the Jackson Hole annual meeting, Powell said his view of the risks had changed. He pointed out that after the "sharp downward revision" in employment data released in early August, the labor market appeared weaker and was in a "peculiar balance caused by a significant slowdown in both supply and demand."

Powell believes that further risks in the labor market provide justification for the upcoming rate adjustment. Before the September meeting, the Fed will receive its final key data next Friday—the August nonfarm payrolls report. This report will serve as an important economic basis for Powell to guide the Fed's decision-making amid the political storm.