Why don’t the markets care more about President Trump’s unprecedented firing of a Federal Reserve governor? The yield on the 30-year Treasury initially rose a mere 0.05 percentage points after the president’s most serious assault yet on the independence of the central bank, before paring back the rise. Investors just aren’t that bothered.
Lots of smart commentators, including my colleague Greg Ip, think markets should be more concerned. Here are five good reasons why they shouldn’t be—and one reason why, perhaps, they should.
It is already priced in. Given Trump’s repeated verbal attacks on the Fed, it isn’t exactly a surprise that he should attempt to fire a governor accused of wrongdoing. Trump has been open about his desire for lower interest rates and anyone worried about Trump undermining Fed independence was surely already concerned (as they should be). Telling Lisa Cook that she’s fired adds little new information.
Trump appointees will probably have a majority of the board by May at the latest anyway. He already has three appointees, one is pending and Chairman Jerome Powell—also appointed originally by Trump—would, by convention, leave after his term leading the board ends, although he doesn’t have to.
She’s resisting. Cook has insisted Trump doesn’t have cause to fire her, so there is likely to be a legal battle. If the courts back her and she keeps her job, it shows U.S. institutions working to limit the power of the White House. If the courts find there is good cause for her to be fired, either the courts are broken—a bigger problem than the Fed—or she ought to go, whoever the president is.
It eases the pressure on Powell. A focus on Cook, especially during a long legal fight, means less on Powell, who up to now has been under concentrated fire from Trump. Since in the Fed system it is rare for many policymakers to vote against the chairman, investors care a lot more about Powell than they do about Cook.
Trump isn’t appointing clowns. So far at least, there is no sign that Trump is appointing pure yes-men. Sure, two of his first-term appointees, Michelle Bowman and Christopher Waller, voted to cut rates at the last meeting, perhaps to ingratiate themselves with the president ahead of the choice of Powell’s replacement. But voting for cuts was hardly a wild move: The market now expects a cut at the next meeting anyway after Powell talked about weaker growth prospects.
And sure, Stephen Miran, the chair of the Council of Economic Advisers, nominated to join the Fed board, has sucked up to Trump’s economic views and is no defender of Fed independence. But none have lobbied to slash rates by the 3 percentage points suggested by the president. His leading candidates to replace Powell as chairman are also well within the mainstream of economics.
If the Fed moves to be dovish rather than hawkish, that might fractionally raise inflation. But we’re talking about small moves here that Powell appears ready to make anyway without the president seizing control of monetary policy.
You may not be convinced by these reasons. Investors concerned about Fed independence should bet on lower interest rates in the short term and higher yields on long-dated bonds as inflation worries rise. Buy 2-year Treasurys and sell the 30-year. This would make money if the market started to sniff a dovish Fed mistake, and would make an absolute killing if a fully politicized Fed followed the disastrous policies of Argentina, Turkey or Zimbabwe and focused on financing the government rather than stopping runaway inflation.
Yet, markets sometimes ignore problems right up until they suddenly don’t. If that is what’s going on, there is a problem.
The good reason to worry that this might be the case is the feedback loop: Markets aren’t concerned in part because Trump seems to back down from extreme moves when markets sell off. So long as investors feel they have Trump reined in, they think he won’t do the things that would damage them the most.
Yet, the feedback loop only works if markets sell off hard whenever Trump does dumb stuff. If, say, he appointed a crypto bro or one of his children as Fed chairman (he tried to appoint a goldbug to the Fed in his first term, stopped only by the Senate), investors would surely sell in a big way. Then the long 2-year, short 30-year trade would really come into its own.
There is no sign of this sort of extreme move happening and the market isn’t betting on it. But for those who fear the loss of Fed independence, this is the way to at least make money if it does happen.
Write to James Mackintosh at james.mackintosh@wsj.com
