President Donald Trump attempted to remove Federal Reserve Governor Lisa Cook, prompting a legal challenge over central bank independence. Some investors responded positively, anticipating that political pressure could lead to lower interest rates over time. Market indexes stayed near flat, the Nasdaq gained, long-term Treasury yields rose while short-term yields fell, steepening the yield curve. Analysts warned that entrenched expectations of institutional integrity may be broken. Jay Hatfield argued the Fed is too tight, around 150 basis points above neutral. A Trump appointee, Stephan Miran, could give Republicans a governing board majority alongside Michelle Bowman and Christopher Waller.
"This is very positive," Jay Hatfield, CEO of Infrastructure Capital Advisors, told Fortune. "The simple way to say it is that eliminating Fed incompetence is far more important than defending alleged Fed independence. The Fed has always been political; it's only Trump who talks about it in public. Indeed, markets largely shrugged off the announcement, to the bewilderment of some economists: Robin Wigglesworth of FT Alphaville argued markets are being "preposterously sanguine." "Entrenched expectations of institutional integrity are now kaput," Wigglesworth wrote."
The S&P 500 and Dow traded around the flatline Tuesday morning, while the Nasdaq even gained 0.3%. Long-term Treasury yields rose after the Trump move, while short-term yields slipped, steepening the curve, indicating that investors bet rates may fall in the near term but drift higher if a politicized Fed proves less attentive to inflation. The U.S. dollar index was last down 0.3%.
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