U.S. bond investors expect President Donald Trump’s latest attempt to tighten control over the Federal Reserve to weigh on long-dated Treasuries, with concerns that an overly dovish central bank could lose credibility in fighting inflation.
On Monday night, Trump escalated his clash with the Fed by attempting to fire Governor Lisa Cook over questions surrounding past mortgage applications. Cook has rejected the allegations, and her lawyer confirmed she will file a lawsuit to block Trump’s effort.
The push to remove Cook adds to Trump’s repeated pressure on the Fed to cut interest rates since returning to the White House. If successful, the move could give Trump’s appointees a majority on the Fed’s board, potentially shaping a more dovish monetary policy stance.
Analysts warn that this could mean lower short-term yields but higher long-term yields as investors demand greater term premiums due to inflation risks and uncertainty. Vanguard’s John Madziyire said looser-than-necessary policy would likely raise expectations for inflation and lead to higher premiums on long-dated U.S. debt.
The initial market reaction was muted, with 10-year Treasury yields steady near 4.27%. Still, analysts noted yields would likely be lower without concerns over tariffs and Fed independence. Parts of the Treasury yield curve steepened Tuesday, with short-term yields falling on expectations of rate cuts, while long-term yields rose on inflation concerns.
BMO Capital Markets said Trump’s challenge to Fed independence could push term premiums higher and steepen the yield curve further. While inflation has cooled since its 40-year peak in 2022, it remains above the Fed’s 2% target, limiting the central bank’s ability to cut rates too aggressively without sparking bond market backlash.
Global policymakers also stressed the importance of protecting central bank independence. The new head of the Bank for International Settlements emphasized inflation control as a priority, while economists warned that political pressure to favor cheap government financing risks undermining stability and pushing long-term borrowing costs higher.
