President Donald Trump on Monday removed Lisa Cook, a member of the Board of Governors of the United States Federal Reserve system, from her post “effective immediately”.Cook, who has not been charged with wrongdoing or convicted of a crime, said “no cause exists under the law” to remove her, and that she would not resign.The unprecedented action by the President comes amid his severe and open criticism of the Fed for not cutting interest rates in the economy and, as such, undermining his efforts to “Make America Great Again”.The episode could lead to a protracted legal battle that may end either in a reassertion of the existing institutional order of central bank independence, or in its redefinition in ways that Trump prefers. At stake are wide-ranging ramifications, including on the credibility of the US dollar as the safe-haven currency of the world.Fed & Board of GovernorsThe US Federal Reserve comprises 12 Reserve Banks (each headed by a president) and a seven-member Board of Governors. (This is different from India, where there is only one central bank, the Reserve Bank of India.)The Fed has five roles — (i) conducting US monetary policy, (ii) promoting financial system stability, (iii) supervising, regulating financial institutions, (iv) fostering payment and settlement system safety and efficiency, and (v) promoting consumer protection and community development.The Board of Governors plays a critical role, guiding the operation of the Federal Reserve system and overseeing the operations of the 12 Reserve Banks. The Board is an agency of the US federal government — its members are nominated by the President and confirmed by the Senate. However, the Board reports to, and is directly accountable to Congress.Story continues below this adAllegations against CookLisa Cook, the first black woman on the Fed’s Board of Governors, was nominated by President Joe Biden in 2022 (and reappointed in 2024) for a term that would run until 2038. She had earlier worked at the US Treasury (similar to India’s Finance Ministry) and in the Barack Obama White House.Cook is accused of making false statements while getting mortgages (loans) on two houses in 2021. In a criminal referral to US Attorney General Pam Bondi on August 15, Director of the Federal Housing Finance Agency William J Pulte alleged that in both loan agreements — signed within weeks of one another for a house each in Michigan and Georgia — Cook had claimed that the property would be her primary residence.In the US, the interest rates charged on loans for houses designated as primary residence is lower.“It is inconceivable that you (Cook) were not aware of your first commitment when making the second. It is impossible that you intended to honor both,” Trump said in the letter dismissing Cook, which he posted on social media.Story continues below this adLegality of Trump’s actionThe Federal Reserve Act says “Each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”Under standard definitions, “cause” refers to malfeasance and/ or incompetence in office. “I have determined that there is sufficient cause to remove you from your position,” Trump said in his letter.In a statement released through her attorneys, Cook said Trump had “purported to fire” her without legal cause and with “no authority”.The questions then, are: (i) Can Cook be fired while an investigation is still pending? And (ii) Is there enough evidence for Trump to claim “cause”?Story continues below this adThe US central bank has been historically shielded from direct political actions, and the US Supreme Court suggested this May that it was inclined to provide a wider shield to the Governors at the Fed.“The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States,” the court said in its order in Trump v. Wilcox.This is the third iteration of a central bank in the US, and it has been argued that it enjoys the same protections as the first two iterations (1791-1811 and 1816-1836).Upshot and implicationsFor decades, the US dollar has been considered to be the second safest asset after gold. Everyone — be it an individual or a company or a foreign central bank — wants to keep their savings and investments in dollar denominated assets.This is essentially for two reasons.Story continues below this adOne, the belief that the US economy will continue to grow stronger. Two, the trust they have that US policymakers, and especially the Fed, will not allow the dollar to lose its value.A currency loses value when there is uncontrolled and high inflation.Governments are typically the biggest borrowers in any economy, and like any borrower, they want interest rates to be low. It is a central bank’s responsibility to preserve the sanctity of the monetary system and the value of the currency. To that end it often needs to raise interest rates or keep them high. This creates conflict between the political executive and the central banks.Trump has been freely berating Jerome Powell, the Chair of the Fed’s Board Of Governors, for being “too late” in cutting interest rates. This has spooked both markets in the US and investors around the world, who see it as Trump’s efforts to undermine the Fed’s independence. If that happens, dollar-denominated assets (like US Treasury bonds) will likely be sold and their yields will go up.Story continues below this adIn the short term, actions such as firing Governors may force the Fed to cut the Federal Funds Rate (the interest rate at which commercial banks in the US borrow from each other overnight). But they will also lead to a spike in the yields of long-term (10-year or 30-year) bonds.That’s because market participants will realise that the Fed may not be in a position to maintain price stability, and inflation would likely spike in the coming months and years.This also means that the dollar’s exchange rate will likely take a hit, at least against its closest rivals such as the euro or the yen.