Trump's Attempted Firing of Fed Governor Rocks US Financial Markets

Strategic Insights -

Investors grew anxious Monday night after US President Donald Trump announced that he was firing Federal Reserve governor Lisa Cook, citing allegations of mortgage fraud. This decision sent shockwaves through the financial markets, with the long-dated US government debt selling off as investors bet that increased political pressure would lead to lower rates in the short term but higher rates in the future. The US dollar weakened, and two-year Treasury yields fell by 0.04 percentage points to 3.69 per cent, while 30-year yields rose as much as 0.06 percentage points, with the gap between the two reaching 1.25 percentage points, its widest in three years.

Key Takeaways:

  • The attempted firing of Fed governor Lisa Cook by US President Donald Trump sent shockwaves through the financial markets, causing the long-dated US government debt to sell off.
  • Investors are betting that increased political pressure will lead to lower rates in the short term but higher rates in the future, as Fed officials are forced to fight higher inflation.
  • The US dollar weakened, with a 0.3 per cent decline against a basket of its peers, while two-year Treasury yields fell by 0.04 percentage points to 3.69 per cent.
  • 30-year yields rose as much as 0.06 percentage points, with the gap between the two reaching 1.25 percentage points, its widest in three years.
  • Economists and investors say that Trump's pressure on the central bank is the most prominent example of a new era of fiscal dominance, where central bank policy becomes more dictated by governments' need to keep borrowing costs low to service huge debts.
  • Elizabeth Warren, the top Democrat on the Senate banking committee, accused Trump of making an "authoritarian power grab," while legal scholars said the White House would have to show cause to fire Cook.

Sources:

  • [London Kate Duguid's article, no online publication date available]