Rechewing Fed Independence Fears

Apparently, summer reruns aren’t just for television: Fed independence fears are getting a re-airing, too, with reports that President Donald Trump is spending lots of time on the phone with Fed head Kevin Warsh and renewing his attempt to fire Fed Governor Lisa Cook. For stocks, we think this is classic cud chewing—a time-honored bull market tradition.

When last we left the Cook saga around Independence Day, the Supreme Court had ruled she could keep her job while contesting Trump’s attempt to fire her over alleged mortgage fraud, marrying its ruling with a full-throated defense of Fed independence. At the time, Trump hinted he would try again, and last week, White House Deputy Chief of Staff Daniel Scavino sent Cook a letter informing her Trump is “considering removing” her, noting the Supremes’ ruling that she is “entitled to notice and some opportunity to respond prior to her termination,” and inviting her to respond by August 26.^[i] Cook’s lawyer pledged to continue fighting the allegations, and perhaps the Supremes will host everyone involved again. Unsurprisingly, most coverage continues calling the fraud allegations a pretext for Trump to stack the Fed’s board with more rate-cutters.

And in the meantime, according to The Wall Street Journal, Trump has been lighting up Warsh’s phone, resurrecting the tired meme about Warsh being the White House’s “puppet.” Never mind that, per the Journal, Trump was seeking Warsh’s guidance on “how the war in Iran and the rapid rise of artificial intelligence are affecting the economy,” nor that by all accounts, Warsh’s replies matched his public statements about the economy’s health.^[ii] No one alleges Trump delivered monetary policy instructions. Trump, for his part, sought to downplay all of it Monday, saying: “I’ve only spoken to him one time briefly a few days ago, just a conversation. They made it sound like I live and breathe, you know, I speak to Kevin all the time, every time.”^[iii] We could simply make some Sleepless in Seattle jokes and call it a day, but apparently the mere possibility of communication between the White House and Fed head is sparking fear.

We think it all goes too far. Whether Trump and Warsh had one phone chat or dozens, the Fed head is one vote on the Federal Open Market Committee (FOMC) and can’t steer monetary policy without the majority of the group on board.^[iv] That board happened to vote 9 – 3 to hold rates steady last month, with the three dissenters preferring to raise them. Those dissenters: Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan. Cook voted with the majority, making it totally unclear that removing her would swing monetary policy decisions and deliberations.

As for Warsh, set aside the innuendo and it seems pretty clear he isn’t executing rate-cut orders from the White House. Instead, he seemingly took Martin’s Little Pill in record time. That mythical pill, according to former Fed head William McChesney Martin, is something the powers that be make new Fed heads take, and it makes them forget everything they ever knew about monetary policy, economic theory and everything related. Thus, it makes them behave totally at odds with past comments and criticisms of prior Fed heads. Before Warsh took over, he spoke of rates being too high and the Fed not using the wiggle room afforded by AI productivity gains to lower them. But two meetings in, he hasn’t cut rates, and inflation is taking most of his attention and word count.

If recent experience is a reliable guide, none of this will quiet Fed independence chatter. It should, but that isn’t how bull markets work. There generally isn’t some conscious, timely realization a fear is false. Instead, investors hash and rehash it, sometimes for years, presuming the ill effects are only delayed. In the 2010s bull market, investors chewed over the Fed’s balance sheet, politics, the dollar, China’s economic slowdown, consumer debt and more for years, while stocks rose through it. This time, Fed independence fears are in a big mass of cud with higher long-term bond yields, debt, the yen, European politics and others. It gets old, but it signifies the bull market’s wall of worry has plenty of bricks.