A dramatic turn of events before the September resolution: Trump makes a historic move, the court remains undecided, and the Federal Reserve Board faces a "reshuffle."

Just weeks before the Federal Reserve is poised to potentially cut interest rates for the first time this year, an unprecedented political storm is hitting the century-old central bank.

At the center of this storm is the action taken by Trump this week—he attempted to fire Federal Reserve Governor Lisa Cook on the grounds of mortgage fraud allegations. This marks the first time in the 111-year history of the Federal Reserve that a president has attempted to remove a sitting governor.

This week, Cook has filed a lawsuit to prevent her dismissal, and after the preliminary debate in the federal district court in Washington, D.C. on Friday, it remains uncertain whether she will remain in office and whether she can vote at the September meeting.

Trump's unprecedented move complicates the market's almost certain outlook for a rate cut in September.

Chairman Powell had previously hinted at a possible rate cut during the meeting on September 16-17 to address the weakening labor market. Although the market generally expects a 25 basis point reduction from the target range of 4.25%-4.5%, the extent of support for this decision and how subsequent policies will evolve are now shrouded in uncertainty.

The outcome of this power struggle will directly determine the composition of the Federal Reserve Board, thereby affecting the policy balance in the coming months and beyond.

Reshaping the Composition of the Federal Reserve Board

The key to this personnel struggle lies in its direct impact on the balance of power within the Federal Reserve Board.

U.S. interest rates are determined by the Federal Open Market Committee (FOMC), which consists of 7 Federal Reserve governors in Washington and 5 rotating regional Federal Reserve Bank presidents. Among them, the 7 governors, nominated by the president and confirmed by the Senate, form the core of power.

Currently, aside from Powell, the board includes three officials appointed by the Biden administration (including Cook, who typically votes in line with Powell) and two governors appointed by Trump during his first term, both of whom voted in favor of a rate cut at the July meeting.

If the court rules that Cook can be dismissed, her absence could create a 3-to-3 deadlock between Trump's appointees and Biden's appointees (including Powell) on the board.

Furthermore, reports indicate that Trump has informed his advisors that if Cook is removed, he will quickly nominate a successor, which could give his appointees a 4-to-3 majority on the board.

Meanwhile, Trump has nominated his close advisor Stephen Miran to fill a vacant seat on the board, and Miran also supports a rate cut. His Senate Banking Committee confirmation hearing is scheduled for next Thursday.

If he can be swiftly confirmed by the Senate, he may make it in time for the September meeting. At that point, there will be at least three governors aligned with Trump strongly supporting the president's call for a rate cut.

Increasing Divergence in Rate Path

Although there is a certain consensus within the FOMC for at least a 25 basis point rate cut, significant internal divergence remains, and dissent may become the norm.

On one hand, hawkish views still exist. Kansas City Fed President Jeffrey Schmid stated in a speech earlier this month, "Inflation is still too high, so policy should remain moderately tight." On the other hand, some officials appointed by Trump may be more radical. Analysts expect that Federal Reserve governors Bowman or Waller may push for a 50 basis point rate cut. For instance, Waller stated in a speech on Thursday that he would support a 25 basis point cut if the U.S. economy significantly weakens.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, said:

"If this situation continues, we will see quite frequent dissenting votes, and I would not be surprised by that."

The high-profile dissenting votes may confuse investors trying to gauge the future direction of interest rates: Will it be Powell, or the ever-growing Trump camp, that controls monetary policy?

Powell Seeks Consensus Under Pressure

Under the political pressure from the White House and Cook's legal cases, Powell is facing a significant test.

Krishna Guha, Vice Chairman of Evercore ISI, stated:

"Powell will strive to keep the upcoming meeting as unaffected as possible by the various pressures and issues within the Federal Reserve system."

The core basis for Powell's adjustment of policy stance is the changes in economic data. Until July, most Federal Reserve officials remained hesitant about rate cuts, concerned that the White House's tariffs, immigration, and other policies could reignite inflation.

However, at the Jackson Hole annual meeting, Powell indicated that his view on risks had changed. He noted that after the "sharp downward revision" of employment data released in early August, the labor market appeared more sluggish, in a "peculiar balance state caused by a significant slowdown in both supply and demand."

Powell believes that further risks in the labor market provide justification for the upcoming rate adjustments. Before the September meeting, the Federal Reserve will receive the last key data next Friday—the August non-farm payroll report. This report will serve as an important economic basis for Powell to guide the Federal Reserve's decision-making amid the political storm.