President Donald Trump’s campaign to dominate the Federal Reserve reached new heights with his effort to fire Fed Governor Lisa Cook — and Wall Street responded with a yawn. The tepid reaction from markets is perhaps shocking, but it’s not surprising.
The second Trump administration has been consumed by two central themes. The first theme is the unprecedented pace at which this administration has attacked the rule of law and the constitutional system on which it is built. The second theme is the unprecedented weakness of the response from major institutions to the Trump administration’s actions. Wall Street’s passivity amid Trump’s unprecedented attack on the Fed is only the latest example.
To economists, the independence of the Federal Reserve is particularly sacrosanct. They think absolute independence from the president and Congress is the best result for the economy in the long term. Trump, on the other hand, views an independent Fed as his enemy; for months, he’s been browbeating Fed Chair Jerome Powell to cut interest rates in order to boost the economy, despite Powell’s public views that so far, the time hasn’t been right. Trump sees the world as a real estate developer first, and to real estate developers, lower interest rates are like manna from heaven.
Throughout Trump’s campaign targeting the Fed, investors have remained remarkably calm, even now. The stock market dipped briefly when Trump threatened to fire Powell himself — another legally dubious move — but it quickly recovered. Why?
For one thing, traders have continued to have undue confidence in the Fed’s, and specifically Powell’s, capacity to uniquely withstand attacks from Trump. Additionally, there is genuine uncertainty and confusion on Wall Street about the potential consequences of a Trump-controlled Fed. The erratic back and forth on tariffs have, ironically, opened the door to soothing illusions regarding how bad Trump’s personal dominion over government and the economy really is for the corporate bottom line. Wall Street’s aphorism that “Trump Always Chickens Out” (TACO) has also helped to sustain the stock market highs.
There’s also another important factor at work. While writing at my publicationNotes on the Crises this year, I have argued that stock markets are “conventional wisdom processors.” What this means is that traders do not simply buy and sell on new information but on how they believe this new information fits into their compatriots’ views of the world. This may not seem like a major distinction, but it is. A Trump win last November was anticipated to be “good” for stocks by their conventional wisdom, and indeed, the stock market went up after his election. These “conventional wisdoms” can be surprisingly sturdy in the face of events that seem explosive to us outsiders.
For many years, business groups and conservatives argued regulatory and tax uncertainty would disrupt the economy and lead to a sharp negative reaction from markets. These were allegedly major factors preventing the recovery from the Great Financial Crisis. Of course, there were always doubters to such narratives — myself included — but they have never appeared as farcical as they do today. In addition to Trump’s attacks on the Fed, he upended global trade and made tariffs a matter of his erratic and personal discretion. He is concentrating control over the federal government’s budget and claiming power to not spend what Congress has ordered to be spent. He claims widespread authority to control agencies, including agencies legally designated as “independent.” This is without even commenting on his use of the military in U.S. cities. But the markets don’t seem to care about such massive uncertainty about the future.
The threat to the rule of law emanating from a second Trump term was clearly not part of investors’ calculations. It’s important to pause on this point. Stock market traders are neither legal experts, nor scientists. But for too long, “market judgment” has been treated as, if not infallible, at least the best judgment given the evidence and information available. The response of the stock market to events of the past year shows how false that is. The reality of Trump’s threat to the very system that investors depend on has failed to become the conventional wisdom among traders, and thus Wall Street continues its muted response to the cataclysmic.
Which brings us back to the Federal Reserve. The fact is, the looming death of the Fed’s independence came in February with the Trump administration’s attack on independent agencies writ large. In the U.S. legal system, the Federal Reserve’s leadership has no special protections against removal that other independent agencies do not have (even if the Supreme Court might contort itself to suggest otherwise). If Trump’s initial executive order to rein in independent agencies was not sufficient to raise alarm among investors, Trump’s firing of two Democratic appointees to the independent Federal Trade Commission in March should have been. Yet the conventional wisdom on Wall Street that the Fed was safe has not budged.
In fairness to the stock market and the traders whose rituals bring it to life, the Federal Reserve’s continued control over monetary policy appears to be an “either/or” question. Either it will or it won’t be an independent central bank — and it’s hard for investors to price in something like that.
This is where the role of leaders come in. Leadership — especially leadership with widespread credibility on Wall Street — can effectively change the game. A particularly respected leader could make the rule of law a far more active part of how the stock market arrives at its conventional wisdom.
The leader I have in mind is, of course, Federal Reserve Chair Jerome Powell.
If Powell does not come to Cook’s defense and continue to treat her as a governor-in-good-standing, he will be the Fed chair who oversaw the destruction of the Federal Reserve’s prized independence. Given the financial industry’s myopic worldview about Trump’s second term so far, Powell’s willingness to defend not just the future of the economy but the rule of law in the United States might be one of the few things that could shake it awake. Powell has a duty not just to the institution he holds dear but to the United States Constitution and the American people to speak forthrightly at this very late hour.
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