It’s a curious thing that the most aggressive move yet to influence the world’s most important central bank resulted not in a raucous reaction in the market but a whimper.
Stocks on Tuesday barely budged. The 10-year (^TNX) meandered down a hair. And longer-dated US bond prices rose only slightly, even as concerns mounted that Trump’s moves against the Federal Reserve’s independence could stoke inflation and instability.
The reaction was nothing like the post-“Liberation Day” sell-off. Back then, the bond market strong-armed the president into backing away from his most punishing tariff policies.
But this time, as the president attempts to fire a Federal Reserve governor, Wall Street appears largely unbothered. What changed?
Part of the answer has to do with timing. Right now, in the short term, the interests of the three main players — the Fed, the president, and the market — are all very much aligned.
While Trump appears to be wielding allegations of mortgage fraud as a pretext to oust Lisa Cook, he’s already publicly stated his policy aims for the Fed: He’s demanding lower interest rates. That’s what the bulk of investors want too. Fed Chair Powell signaled at Jackson Hole that he and his colleagues are ready to start cutting in as little as three weeks’ time, which makes the practical considerations for getting rid of Cook more abstract.
As economists Stephen Brown and Thomas Ryan from Capital Economics put it in a note on Tuesday, “It remains unclear whether Trump’s letter firing Cook, posted on social media [Monday], will have any practical effect on policy setting in the near term.”
A fact that “perhaps explains the muted market reaction,” they added.
But even when markets tolerate a legally dubious but aligned maneuver, what happens in the longer run should the Fed see itself remade as a political entity?
“If the president were successful, the outcome would be momentous,” Michael Feroli of JPMorgan wrote in a note on Tuesday. Feroli added that if Cook is eventually removed, other officials not sufficiently in line with the president’s agenda could also face the ax.
“This would add to upside inflation risks,” Feroli said. And all else equal, higher inflation suggests higher interest rates, the opposite of what the White House is looking for.
Trump’s picks to fill new vacancies on the Fed board could also exert significant power.
Joined by the two most recent rate cut dissenters, for instance, a Trump-aligned bloc of governors could attempt to remove any of the 12 Federal Reserve Bank presidents, remaking an independent institution into another part of the executive branch. That’s an outcome that some market observers say is far-fetched. But so is attempting to throw out a Fed governor, and here we are.
As Michael Farr, chief market strategist at Hightower Advisors, said Tuesday, “even the perception of the Federal Reserve being under the influence of the Treasury weakens credibility, which is probably the most important tool the Fed has to service the economy.”
If Powell is viewed as a nonpartisan leader worth listening to, perhaps another outcome of a politicized Fed is that central bank chairs will no longer have any real juice as influential policymakers. And future decisions on rate setting will always be colored by political expedience.
The point of keeping rates higher for longer was to prevent the Fed from having to raise rates again, later on, in a more economically painful way. That’s a source of disagreement and worth debating. And while it might be tempting to see the markets “agreeing” with Trump, it only looks that way.
Higher stock prices in the near term are nice. But higher long-term interest rates, a big risk that a politicized Fed would invite, are certainly far from a desired outcome.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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