Federal Reserve Governor Lisa Cook emphasized that the Fed urgently needs to restore its credibility by bringing inflation back to its target level in the near term. Her remarks indicate that the Fed will remain firmly focused on price stability amid ongoing economic and political pressures.

Clearly focus on inflation control

In prepared remarks for her Miami event on Wednesday (February 4), Cook clarified her priorities. She said, "Unless I see stronger evidence that inflation is sustainably falling back to target levels, this will be my focus, barring any unexpected changes in the labor market."

Cook emphasized that the Federal Reserve's reputation is at risk after a prolonged period of high prices. She stated, "After nearly five years of inflation consistently above target, it is crucial that we maintain our credibility by returning to an anti-inflationary path and achieving our goals in the near future."

The pause in interest rate hikes reflects a new cautious attitude.

Her stance aligns with the Federal Reserve's recent decision to maintain the benchmark interest rate within the 3.5% to 3.75% range. Cook noted that she supports this move because she now believes "the risks are tilted towards higher inflation."

This cautious outlook was echoed by other policymakers, leading to three consecutive rate cuts by the end of 2025. In the latest decision, Federal Reserve officials also upgraded their assessment of the economy and labor market, suggesting that further rate cuts are not currently necessary.

Political background and leadership issues

Cook's remarks come at a time of shifting political landscape at the Federal Reserve. US President Donald Trump nominated former Fed Governor Kevin Warsh to be the next chairman. Trump has also been a strong advocate for significant interest rate cuts, raising concerns among observers about the Fed's future resolve to control inflation.

In his remarks, Cook did not mention the Trump administration's attempt to remove her from the board. Her current position at the Federal Reserve is awaiting a Supreme Court ruling, expected in the coming weeks.

US Dollar Outlook

Lisa Cook's hawkish stance is a short-term boost to the dollar, as it quelled some speculation about a policy shift and emphasized the possibility of high interest rates. During Thursday's Asian trading session, the dollar index rose slightly, briefly hitting a more than one-week high of 97.75, a gain of approximately 0.11; the dollar index has recently rebounded from a four-year low (95.57).

However, from a longer-term perspective, this incident exposes and exacerbates the political risks facing the Federal Reserve's independence. If the White House continues to exert pressure and successfully changes the Fed's leadership and policy direction, then any hawkish remarks from officials at present will only be "temporary noise," ultimately overshadowed by a politically driven easing trend. This erosion of the Fed's independence and institutional credibility is a "Sword of Damocles" hanging over the dollar, and its potential damage far outweighs the short-term boost from a single hawkish speech.

Therefore, the market reaction may exhibit a pattern of "short-term rebound, long-term caution." The specific direction of the US dollar index will depend on subsequent economic data, and more importantly, on how the US political sphere addresses developments related to the independence of the Federal Reserve.



(US Dollar Index Daily Chart, Source: FX678)

At 10:32 Beijing time, the US dollar index is currently at 97.70.