Markets are adjusting to a growing political risk premium as U.S. President Donald Trump ramps up calls for Federal Reserve Chair Jerome Powell’s resignation, fueling investor concern over the central bank’s independence and its implications for inflation, interest rates, and asset pricing.
📉 Key Market Implications:
Treasury 30-year yields spiked above 5% for the first time since May as markets priced in long-term inflation and fiscal concerns.
Breakeven inflation (5Y TIPS) hit 2.476%, a 3-month high.
A “politically captured Fed” could trigger steeper yield curves, as short-term rates fall and long-term rates rise due to eroding trust and inflation expectations.
💬 “If markets believe that a Fed under pressure will lower rates regardless of economic fundamentals, inflation expectations will rise — and the move could be significant,” said Guy LeBas (Janney Capital Management).
📌 Political Pressure Mounts:
Trump cannot fire Powell over policy disagreements but has publicly called for his exit.
The administration is reportedly exploring legal avenues and even searching for a successor this fall, fueling speculation about a “shadow” Fed chair.
📊 Investor Reactions:
Investors are shifting toward gold, quality equities, and away from Treasuries.
Allspring and Truist have begun positioning for a steeper yield curve.
JPMorgan CEO Jamie Dimon underscored the importance of Fed independence, warning against politicizing monetary policy.
⚠️ While the probability of Powell’s departure remains low, the perceived threat is rising, prompting volatility across bond markets and caution in equities.
📣 “Once investors question Fed independence, it becomes a less stable monetary environment,” said Jack Ablin (Cresset Capital).
