Investors largely shrug off Trump firing of Fed governor, see "positives"
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Stocks are barely under pressure, the dollar recovered the worst of its losses and the yield curve continued to steepen after President Trump fired Federal Reserve governor Lisa Cook on Monday.
Why it matters: These market moves are fairly muted in response to the administration's latest attempt to threaten central bank independence.
What they're saying: At least some investors looked past the historic disruption to economic governance in favor of the short-term market possibilities.
- "We believe that the removal of Lisa Cook as a Fed Governor is very positive," wrote Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors.
- The removal of Cook could lead to a Republican majority within the central bank, Hatfield wrote. That could make the Fed more likely to view tariffs as a one-time tax, versus a prolonged inflation driver, something Fed chair Powell also signaled last week.
- Hatfield sees a Republican majority at the Fed leading to two cuts this year and three next year.
Yes, but: What the market might be "getting wrong" right now is a focus on rate cuts, rather than considering what the long end of the yield curve might do in response, Peter Tchir, head of macro strategies at Academy Securities, said on Bloomberg Television.
- Remember, the last time the Fed cut, long-duration bonds rose, as investors priced in higher-for-longer rates in response to sticky inflation.
- The firing of Cook could feed higher yields and undermine the dollar, according to a note from Sree Kochugovindan, senior economist at Aberdeen.
- In "an environment of proactively easy policy" investors could see bonds "do fine relative to cash," writes Bob Elliott, chief investment officer at Unlimited Funds.
The intrigue: The bond market historically gives the final vote on whether there are policy mistakes, either from the White House or the Fed, according to Fabio Natalucci, CEO of the Andersen Institute for Finance and Economics.
- Some investors have drawn parallels between the Trump administration's Fed intervention and the aggressive moves by emerging-market leaders to influence monetary policy — which often go poorly.
Between the lines: Equity investors just had a euphoric rally off the back of Fed chair Jerome Powell opening the door to rate cuts as soon as September.
- Cook was considered a dovish-leaning member, and her term was not set to expire until 2038.
What to watch: So many of the details around this firing are unknown, and are likely to be sorted out in the courts in coming days and weeks.
- Whether they're resolved by the Fed's Sept. 16-17 meeting, and whether Trump can get a more dovish voice onto the board by then, is entirely unclear.
The bottom line: That last point may ultimately be the defining factor for stocks in the near-term.
