Macro Signposts | 27 August 2025
Please note that Macro Signposts will pause for a late summer recess, resuming the week of 8 September.
I'd like to thank Libby Cantrill, PIMCO's head of public policy, for her contributions to this edition.
Renewed Challenges to Fed Independence
First, a word about Federal Reserve Chair Jerome Powell's speech at last week's Jackson Hole Symposium. His comments did not change our baseline outlook: We expect a gradual series of rate cuts – likely starting with a 25-basis-point cut in September – to return the federal funds rate to a neutral range (3.0% to 3.5%), likely before Powell's term as Fed chair ends in May 2026. In his speech, Powell cited growing downside risks to employment and the transitory nature of tariff effects as reasons why policy "may" need adjustment – the clearest possible signal he could give that the Fed intends to announce a 25-bp rate cut in September without precommitting. However, he also emphasized that the return to neutral, at least during the remaining time he has as chair, is likely to be gradual and dependent on inflationary pressures proving to be one-offs.
Jackson Hole has since been eclipsed: On Monday night, President Donald Trump announced the removal of Federal Reserve Governor Lisa Cook from her position "for cause." Cook swiftly responded that "no cause exists under the law" and she will not resign. The development could be consequential for perceptions of Fed independence – though the potential impact on Fed policy (and interest rates) is far from clear.
Presidential authority to fire Fed governors
Earlier this year, the Supreme Court affirmed the Federal Reserve's special status as a quasi-private institution, whose governors can only be removed for "cause" – a threshold typically reserved for serious misconduct such as fraud. That ruling helped ease concerns about the erosion of Fed independence, after Trump threatened to remove Fed Chair Powell earlier this year.
Trump's new declaration reopens those questions. He cited Cook's alleged false statements on 2021 mortgage agreements raised in a criminal referral by Bill Pulte, director of the Federal Housing Finance Agency, as sufficient cause. However, Cook disputes the allegations, and the issue will likely be litigated.
Ramifications for Fed personnel and policy
This issue is about much more than Cook, in our view. The allegations carry political undertones, given Trump's year-long public pressure campaign for lower interest rates.
Although replacing Cook wouldn't directly change the Federal Open Market Committee's (FOMC) voting majority, her seat matters because it could change the majority voting of the Board of Governors on matters such as Reserve Bank President appointments.
Each regional Reserve Bank board nominates a president for a five-year term, but final approval rests with the Fed Board of Governors. The Board reappoints all of the presidents at the end of February every five years (years ending with a "1" or a "6") in what has usually been a procedural vote.
When the reappointment vote comes up again in February 2026, a Trump-friendly board majority could, at least in theory, veto or reshape the leadership of the regional banks for the next five years. Five regional Reserve Bank presidents also serve as voting members on the FOMC, serving one-year terms on a rotating basis (except for the New York Fed president, whose seat is permanent), so politically inflected changes to their roster could affect policy decisions over time.
There is no precedent for any of this, but some legal scholars also argue that a four-person majority of Federal Reserve Board Governors could remove regional bank presidents outside of the normal five-year reappointment cycle, although they would have to state a reason for the removal.
Uncharted territory
Taking a step back, all of this is uncharted territory. Cook's removal will likely be litigated and take time to proceed through the courts. If Cook doesn't obtain a court injunction against the president's decision, the seat could remain vacant while the case proceeds through the courts.
Even if courts uphold Cook's removal for cause, Senate confirmation of the individuals to fill the open governor seats remains uncertain, despite a Republican majority. Key Republican senators have quietly communicated their refusal to appoint a partisan Fed chair, and we could extrapolate this to the Fed board more broadly. The renewed attention on the Fed could make it harder for the Senate (and the Senate Banking Committee) to confirm a Fed nominee who appears too political, too partisan, or too dovish. Any confirmation process may be difficult and lengthy, potentially resulting in a prolonged period of Fed board governor vacancies.
There is also uncertainty around what individual board governors (even if they are appointed by Trump and confirmed by the Senate) would do once they face the question of reappointing regional bank presidents. According to Bloomberg reporting of a Freedom of Information Act request, current Fed governors Christopher Waller and Michelle Bowman abstained from voting on the 2022 appointment of Chicago Fed President Austan Goolsbee (he still passed with a majority vote), but abstaining is much less consequential than altering decades of precedent and voting to oust a current bank president.
Implications for rates and markets: more uncertainty and risk premium
Trump's criticism of Fed officials this year has focused on their refusal to lower interest rates. However, upending decades of Federal Reserve norms to lower the policy rate by 150–175 basis points – as several Trump administration officials have advocated – may not lower long-term bond yields.
While the market reaction to the news has been relatively muted so far, greater uncertainty, higher term premiums, and steeper yield curves resulting from perceptions of the erosion of Fed independence, regardless of what the Fed actually does, could be an offset. A weaker U.S. dollar, with inflationary implications, could also be problematic for longer-term nominal bond yields. Breakeven inflation rates on U.S. Treasury Inflation-Protected Securities (TIPS) are currently pricing a relatively benign outlook, with limited longer-term inflationary risks, but that could change.
We still think the probability of the FOMC making severe and rapid rate cuts is very low, given the institutional structures still in place and the time needed to litigate what would be unprecedented actions. Indeed, the many reasons to be relaxed about Fed independence remain valid. However, even if the risks appear low, the Trump administration's new strategy warrants investors' attention.
While each potential Fed appointee may appear reasonable in isolation, the potential for a four-member bloc willing to exercise veto power over Reserve Bank presidents (not to mention the risks to economic data integrity – note the recent firing of the commissioner of the Bureau of Labor Statistics) introduces greater uncertainty into a turbulent situation for monetary policy and the broader economy – something that investors will have to eventually confront when they consider portfolio allocation and diversification decisions.
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