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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.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
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.
