September resolution sudden change: Trump makes a historic move, Fed board faces a "reshuffle"

Just a few weeks before the Federal Reserve was preparing for what could be its first rate cut of the year, an unprecedented political storm was hitting this century-old central bank. At the center of this storm was the action taken by Trump this week - he attempted to dismiss Federal Reserve Director Lisa Cook on the grounds of mortgage fraud. This is the first time in the 111 years since the establishment of the Federal Reserve that a president has attempted to dismiss a sitting director. This week, Cook has filed a lawsuit to prevent her dismissal, and after the preliminary debate ended in the Federal District Court for the District of Columbia on Friday, her current status and whether she can vote at the September meeting are still pending. Trump's unprecedented move has made the almost certain prospect of a rate cut in September more complicated. Chairman Powell had hinted at a rate cut at the meeting on September 16-17 to address the weakening labor market. Although the market generally expects a 25 basis points cut from the target range of 4.25%-4.5%, the extent of support for this decision and how subsequent policies will evolve have been cast in shadow. The outcome of this power struggle will directly determine the composition of the Federal Reserve Board, and thus impact the policy balance in the coming months and even longer periods of time. Restructuring of the Federal Reserve Board The key to this personnel struggle lies in its direct impact on the power balance of the Federal Reserve Board. The US interest rate is determined by the Federal Open Market Committee (FOMC), which consists of 7 Washington-based Federal Reserve governors and 5 rotating regional Federal Reserve Bank presidents. Of the 7 governors nominated by the president and confirmed by the Senate, they form the core of the power. Currently, in addition to Powell, the Board includes three officials appointed by the Biden administration (including Cook, who typically vote with Powell), as well as two officials appointed by Trump in his first term, both of whom voted in favor of a rate cut at the July meeting. If the court rules that Cook can be dismissed, her absence may create a three-three balance between Trump appointees and Biden appointees (including Powell) on the Board. Furthermore, it has been reported that Trump has revealed to advisors that if Cook is removed, he will quickly nominate a successor, which could give his appointees a four-three majority on the Board. At the same time, Trump has nominated his close advisor Stephen Miran to fill a vacancy on the Board, with Miran also supporting a rate cut. His confirmation hearing before the Senate Banking Committee is set to take place next Thursday. If he can be confirmed quickly by the Senate, he may be able to attend the September meeting. By then, there will be at least three governors who support the president's rate cut request. Intensified divergences in rate path While there is a consensus within the FOMC for at least a 25 basis points rate cut, internal divisions remain significant and dissent may become the norm. On one hand, hawkish views still exist. Kansas City Fed President Jeffrey Schmid said in a speech earlier this month, "Inflation is still high, so policy should remain moderately tight." On the other hand, some officials appointed by Trump may be more aggressive. Analysts predict that Fed governors Bowman or Waller may push for a 50 basis points rate cut. For example, Waller said in a speech on Thursday that he would support a 25 basis points rate cut if the US economy weakens significantly. Matthew Luzzetti, Chief US Economist at Deutsche Bank, said: "If this situation continues, we will see quite frequent dissenting votes, and I would not be surprised by that." High-profile dissenting votes may confuse investors trying to judge the future path of interest rates: who will control monetary policy, Powell or the increasingly powerful camp of Trump? Powell seeking consensus under pressure Under the political pressure from the White House and the legal case of Cook, Powell is facing a major test. Krishna Guha, Vice Chairman of Evercore ISI, said: "Powell will try to make the upcoming meeting as little affected by various pressures and issues at the Federal Reserve system level as possible." The core basis for Powell's policy adjustments lies in changes in economic data. Until July, most Fed officials were hesitant about a rate cut, fearing that White House policies such as tariffs and immigration could reignite inflation. However, at the Jackson Hole Annual Symposium, Powell said that his view of risks had changed. He pointed out that with the "dramatic downward revisions" to employment data released in early August, the labor market appeared weaker, in a "peculiar equilibrium state resulting from a significant slowdown in supply and demand." Powell believes that further risks in the labor market provide reason for a rate adjustment to be made soon. Before the September meeting, the Federal Reserve will receive the final key data next Friday - the August nonfarm payrolls report. This report will be a crucial economic basis for Powell to guide the Fed's decision-making in the political storm. This article is reprinted from: Wall Street See News; Author: Li Xiaoyin; GMTEight Editor: Chen Xiaoyi.