What the Federal Reserve does — and why Trump's move to oust Lisa Cook has such high stakes

President Trump on Monday announced he was firing Lisa Cook, a member of the Federal Reserve Board of Governors, after one of his allies accused her of mortgage fraud. The move marks an unprecedented intervention into a key pillar of the U.S. financial system, which was specifically created to be insulated from political pressure.

Cook has refused to step down from her position, arguing that Trump has no authority to fire her. Her attorney has said he will file a lawsuit to block her removal, which he said “lacks any factual or legal basis.”

The administration has also pressured Cook to step down from her post while her case is being considered by the courts.

“If I were her in her circumstance, I would take leave,” Kevin Hassett, Trump’s top economic adviser, told reporters outside the White House.

Since returning to the White House, Trump has exerted broad influence across the federal government, reshaping federal agencies around his own political agenda. His effort to do the same thing to the Federal Reserve carries high stakes. While it doesn’t often make news outside of the financial press, the Federal Reserve has enormous influence on the lives of every single American.

Here’s a quick primer on what the Federal Reserve is, what it does and what it might mean if Trump is ultimately able to gain control of it.

What is the Federal Reserve?

The Federal Reserve, frequently referred to simply as “the Fed,” is the most important financial institution in the United States — and arguably the world. Its main purpose is to keep the U.S. financial system stable. It was created in the early 1900s in the wake of a series of financial panics that convinced lawmakers that a central banking authority was needed to keep the financial industry from repeatedly tanking the economy.

One of the most important things about the Federal Reserve is its independence. It is not controlled by the president or Congress. It makes its decisions entirely on its own.

“Our independence is a matter of law,” Federal Reserve Chair Jerome Powell said during a speech earlier this year. “Fed independence has pretty broad support across both political parties and both sides of the Hill.”

The Federal Reserve has broad power to act in the interest of maintaining stability within the economy. It oversees monetary policy, regulates banks and monitors the economy for systemic risk. The most potent — and most heavily scrutinized — tool it uses is interest rates. The Fed’s interest rates determine how much banks charge each other to borrow money. It doesn’t directly set the rate for consumer loans like mortgages. Those come from the banks themselves. But the Fed’s rate does affect a bank’s cost, which frequently influences what it charges its customers.

The Fed is perpetually working to create a balance in the monetary system that prevents prices from rising too fast and also maintains high employment among U.S. workers. High interest rates help keep inflation in check, but they can also slow economic growth and cause unemployment to rise. Low interest rates do the opposite, fueling growth while usually causing inflation to increase.

In relatively stable times, the Fed will typically make subtle changes to interest rates in order to keep the economy steady. But it can also make much more dramatic moves in times of crisis. In the 1980s, for example, the Fed ratcheted rates up to tame out-of-control inflation that had been plaguing the country for years. During the Great Recession and the collapse caused by the COVID-19 pandemic, it dropped interest rates to nearly zero in order to stir up as much economic activity as possible.

Why is Trump so angry at the Fed?

The Fed’s rate decisions are always the source of intense debate because they have a huge influence on what happens in the economy. Trump has criticized its decision to keep interest rates elevated now that post-pandemic inflation has slowly come under control. He has been relentlessly critical of Powell specifically, calling him a “numbskull,” a “Hater” and a “stubborn mule.”

Trump argues that high interest rates are stifling the economy. So far, the threat of inflation spiking again has been enough to hold the Fed back from lowering them much, though there are signals that another cut could be coming next month.

Trump is far from the first president to disagree with the Fed’s decisions. What makes him unique is the lengths he’s gone to in his attempts to influence its actions. Trump has reportedly prepared a plan to fire Powell, a step that legal experts say he has no power to do.

Trump’s attempt to fire Cook raises similar legal questions. Officially, he can only fire her for cause. Cook argues that Trump’s accusations of mortgage fraud are not a sufficient reason for removing her from her position.

What’s at stake?

Congress designed the Fed to be independent because it wanted its decisions not to be influenced by political pressure. Trump’s attempt to break down that longstanding barrier doesn’t just represent a shift from how the Fed operates. Many experts say it also poses major risks for the U.S. economy.

“[Trump’s actions] could endanger the Trump economy, throw markets into a tailspin, and leave Trump’s economic legacy in the basement,” Yahoo Finance columnist Rick Newman wrote on Tuesday.

Trump told reporters Tuesday he’s confident that he’ll soon have a “majority” of his own nominees at the Fed who will agree to lower interest rates. If that happens, it could undermine progress that’s been made on inflation and send prices soaring once again, Newman and others argue.

The bigger danger, though, could be the perception that the Fed is no longer working outside of political influence. The economy’s stability in many ways rests on confidence. Investors, businesses and individual consumers make their financial choices based on the belief that the people overseeing the economy are acting in what they view to be the best interest of economic stability. If that faith erodes, it could have cascading effects throughout the world’s financial system.

“In the long run, preserving the Fed’s independence from politics is not about protecting a few individuals or a Washington bureaucracy. It’s about protecting America’s prosperity,” former Federal Reserve Chairs Janet Yellen and Ben Bernanke wrote in an op-ed for the New York Times last month.