(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Mike Dolan

LONDON, Aug 11 (Reuters) - Federal Reserve Chair Kevin

Warsh's battle to keep the central bank out of politics just got

harder. Any hope that U.S. President Donald Trump would give him

breathing room evaporated last week when the White House

targeted Fed Governor Lisa Cook, thrusting the central bank's

independence back into the spotlight.

Trump's renewed effort to remove Cook over unproven mortgage

fraud allegations suggests two things: the administration is

anxious that the Fed could raise interest rates as soon as next

month, and the president realizes his appointee as chair may be

unable to stop it, even if he wants to.

While public pressure on Cook could backfire and embolden her to

side with the hawks if Trump fails to remove her, there may also

be a calculation that it offers the president a scapegoat if

policy tightens at either of the two remaining meetings before

November's midterm elections. His counterpunch would then be

that any rate hike was a politically motivated move to defy him.

Futures markets see about a 75% chance of a quarter-point rate

increase by the midterms. Regardless of soft payrolls in July,

the main drivers are nearly six years of above-target inflation

and elevated core price rises, alongside the Iran-related energy

shock of the past six months. The outcome at the September 15-16

meeting is basically seen as a coin toss.

Friday's political swipe at Cook was likely mindful of exactly

that.

Trump's renewed effort to remove Cook took the form of a White

House letter saying he was "considering" her removal and

demanding a response within three weeks to what her attorney has

called "baseless" mortgage fraud allegations.The move came

despite a June Supreme Court ruling that recognized the Fed's

special statutory protections and left unresolved whether the

allegations constituted grounds for removal.

After a year of beating this drum, and even after the Supreme

Court pushback, Trump's deadline for Cook to clear her name is

just about three weeks before a critical Fed meeting where every

vote counts in the increasingly split committee.

"The issue of Fed independence has not yet been resolved," wrote

SGH Macro Advisors chief U.S. economist Tim Duy, adding that

this suggests Warsh is either unwilling or unable to back

Trump's long-standing push to slash rates in the face of

elevated inflation.

Warsh himself probably wishes he'd be given more room to

complete his reforms and make his own policy case both

internally and externally, especially given market disquietover

his vague inflation targets and his preference for less public

communication.

However, keeping his distance may prove difficult. The Wall

Street Journal reported last week that Trump has called the Fed

chair repeatedly since Warsh took the top job in May.

Late last month, Trump called Warsh "brilliant" and blamed the

rest of the board for not lowering rates immediately: "I know

he'd love to see lower interest rates, but he's got a board, and

it's a political board, and they want to keep rates up."

INFLATION RISK PREMIUM

Sorting out that board now seems to be a priority again at the

White House.

"If Trump succeeds and ultimately only the accusation of

wrongdoing and the ability to reply are all that is necessary to

replace Fed governors, expect appointees who are willing to

sharply lower rates like former Fed Governor Stephen Miran," Duy

said, explaining the upshot for markets and the economy.

As it stands, three members of this year's Federal Open Market

Committee (FOMC) voted to raise rates last month, while

governors Chris Waller and Cookvoted to hold rates steady,

though both have indicated the Fed may have to tighten to get

above-target inflation back to its 2% long-term goal.

If they were both to vote for a hike next month, the previous

9-3 split in favor of holding rates would become 7-5.

That would leave former Fed Chair and Trump nemesis Jerome

Powell - who remains on the board until his term ends in early

2028 - with the potential to divide the FOMC right down the

middle by switching from his previous vote to support a rate

rise.

Another big question is whether Warsh will publicly back

Cook, as Powell did in the absence of proven guilt.

How should markets react? Ahead of this week's consumer and

producer price inflation reports, the biggest influences on Fed

thinking, it is hard to get a clean view. Higher long-term

Treasury yields and a weaker dollar have

periodically emerged during intense bursts of the Fed

independence saga over the past 18 months, although it's unclear

whether investors see the issue as corrosive or a passing storm.

The most straightforward approach is to consider the impact of

fuzzier inflation goals from Warsh with renewed political

pressure to load the board with rate-cut advocates - a

combination that could aggravate long-term inflation risk

premiums in bond markets.

"If July marked the beginning of a deterioration in

confidence about the Fed's willingness to defend the inflation

target, the long end is dramatically under-pricing the risk,"

Barclays strategists noted this week, pointing to a noticeable

move in long-dated bond yields and inflation expectations after

Warsh's most recent press conference.

"We think that makes the next couple of weeks unusually

important. Medium- and long-term inflation compensation should

be watched closely to gauge how much damage, if any, was done to

the Fed's market credibility and confidence over the past week,"

they wrote, highlighting the five-year, five-year forward

inflation-linked swap.

Warsh could, of course, stamp his independence on the next

meeting by voting with the hawks. Without that unlikely outcome,

doubts about the Fed under his leadership - its commitment to

price stability and its distance from White House political

imperatives - will smolder at a dangerous time for the bond

market.

(The opinions expressed here are those of Mike Dolan, a

columnist for Reuters.)

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