The Federal Reserve, long held as a bastion of U.S. economic stability and independence, has been thrust into a storm of controversy following President Donald Trump’s decision to fire Governor Lisa Cook. The move, announced on August 25, 2025, and immediately challenged in court, has ignited debate over the very foundation of the central bank’s autonomy and the future of monetary policy at a time when the U.S. economy faces mounting crosscurrents.
Cook, who filed a lawsuit in the U.S. District Court for the District of Columbia on August 29, called her dismissal an “unprecedented and illegal attempt” that threatens the independence of the Federal Reserve Board, according to reporting by Politico. Her future—and the question of whether she will attend the crucial September 16-17 Federal Open Market Committee (FOMC) meeting—now rests with the courts. The Federal Reserve itself has pledged to abide by judicial rulings, but the uncertainty has already rippled through financial markets and policy circles alike.
The legal battle comes at a pivotal moment for the Fed. Market expectations for a rate cut at the upcoming September meeting have risen, with traders assigning an 87% probability of a cut, up from 84% the previous week, according to EL PAÍS. Yet the backdrop is anything but straightforward: U.S. inflation stood at 2.7% in July, unchanged from June but edging higher than in previous months, while core inflation (excluding food and energy) reached 3.1%—the highest in six months. These figures suggest that price pressures remain stubborn, complicating any move to ease policy.
Historically, the Fed has been reluctant to cut rates when inflation is rising. Since 1973, only 16% of rate cuts have occurred in such an environment. The last time the central bank made such a move was in the second half of 2007, on the eve of the Great Financial Crisis, when early signs of economic weakness were prioritized over inflationary risks. That decision, as Bank of America’s Howard Du notes in his report “Ghosts of 2007,” led to a weaker dollar and ultimately contributed to the financial turmoil that followed. “This is a possible but historically rare regime. Fed rate cuts amid rising year-over-year inflation suppress the real policy rate in the U.S. and lead to a weaker dollar,” Du wrote, highlighting growing concern among investors.
The current situation is further complicated by the shifting composition of the Fed’s leadership. Trump has nominated Stephen Miran to fill a vacancy left by Adriana Kugler, who departed before her term was set to expire in January. If confirmed, Miran would join a board already tilting more dovish, with Trump-appointed governors Christopher Waller and Michelle Bowman registering dissenting votes in favor of more aggressive rate cuts at the last meeting. According to Fortune, Waller stated on August 28 that he would not support a cut of more than a quarter percentage point in September, but left the door open for change if labor market data worsens: “While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly, and I think it is important that the FOMC not wait until such a deterioration is under way and risk falling behind the curve in setting appropriate monetary policy.”
Yet, even if the Fed delivers the rate cut Trump seeks, it may not satisfy the president, who has publicly argued that rates should be more than 300 basis points lower. The result is a central bank increasingly at odds with the White House, and a policy process that may become more contentious and prone to split votes. The FOMC, which has 12 members, has never experienced a tie vote on interest rates, but as turnover accelerates and divisions deepen, that possibility now looms larger than ever. The committee’s rules do not specify how a tie would be resolved. Robert Eisenbeis, former director of research at the Atlanta Fed, told Fortune that in such a scenario, the federal funds rate would simply remain unchanged, as there is no override provision for the chair to break a tie. “There is no precedent here,” he said. “I would presume there would be the option for a revote, but if not, then no change in the funds rate. If there is no change in the rate, then the next meeting is where another review and vote would take place.”
Christopher Hodge, chief U.S. economist at Natixis CIB Americas, added that while the FOMC is a self-governing committee with the ability to alter its rules, the chair’s authority in such situations is more custom than codified law. “In the absence of an explicit tie-breaking rule, the chair is generally understood to have the ability to cast a deciding vote or guide the committee toward resolution, as is common in other deliberative bodies with a presiding officer,” Hodge explained. However, this practice is not formalized in any public document.
Meanwhile, the Fed’s actions have not gone unnoticed by global markets. The dollar has depreciated 12% against the euro so far in 2025, and long-term Treasury yields have risen by 60 basis points in the past year—even as the Fed has cut rates by a full percentage point. This disconnect, as EL PAÍS notes, is largely due to inflation expectations and concerns over the Fed’s independence. ING analysts argue that Trump’s firing of Cook and the perception of a more politicized Fed are negative for the dollar’s outlook.
The impact extends beyond the central bank’s walls. In the U.S., most mortgages are tied to the 10-year Treasury yield rather than short-term rates, meaning that higher long-term yields can blunt the effect of rate cuts on housing and business loans. Additional pressures, such as Trump’s tariffs and a growing fiscal deficit, are also pushing yields higher and fueling inflationary pressures. David Roberts, head of fixed income at Nedgroup, told Bloomberg, “The combination of weaker U.S. payroll growth and the White House baiting of the Fed, both institutional and personal, is starting to create real issues for investors in US Treasuries.”
Other central banks are grappling with similar dilemmas. The Bank of England, for example, has cut rates more aggressively than the Fed, lowering its policy rate from 5.25% to 4% since August. Yet, inflation in the UK rose to 3.8% in July—the highest since January 2024—prompting a rare deadlock in its Monetary Policy Committee earlier this month. The deadlock was broken by a revote, resulting in a narrow 5-4 decision to cut rates by a quarter point, as reported by Fortune.
As for the Fed, the road ahead is anything but clear. With Jerome Powell’s term as chairman set to expire in May 2026 and only eight months left in his current mandate, the central bank faces unprecedented legal, political, and economic challenges. Whether Cook will reclaim her seat, how the FOMC will navigate potential ties, and whether the Fed can maintain its independence in the face of mounting political pressure are questions that remain unresolved.
What is certain is that the outcome of this legal and institutional drama will shape not just the Fed’s next policy moves, but the credibility of U.S. economic stewardship for years to come.
