Is it possible that inflation would actually be lower if President Donald Trump took over the Federal Reserve? While some critics believe a potential Trump takeover of the Fed would result in higher inflation and higher interest rates, not everyone is convinced.
In fact, the bond market showed a very different sign when Trump targeted Fed Governor Lisa Cook, accusing her of mortgage fraud, and promptly fired her, a decision that is currently being challenged in court. The Department of Justice is investigating the mortgage fraud allegations against Cook, according to media reports. A federal court ruled that Cook can keep her job, but Trump is appealing the ruling.
Economist Peter St. Onge reviewed bond charts that contained real-time price movements when Trump fired Cook. He found immediate, meaningful bond yield drops, before suggesting that if the Fed loses independence, inflation and rates would go down.
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What Bond Yields Tell Investors
Bond yields indicate the current cost of borrowing money. Short-term bond yields are more sensitive to public spats between Trump and the Fed, as well as immediate policies like new tariffs.
St. Onge wasn't surprised to see two-year bond yields plunge, especially since Trump has been on record many times saying that he wants lower interest rates. However, St. Onge was shocked that Cook's disputed dismissal caused 10-year bond yields to drop by almost 10 basis points in 90 minutes.
"[That's] close to what it normally moves in a month," St. Onge wrote.
He also said that 30-year bond yields dropped upon Trump's announcement.
"In other words, taking the data at face value, markets think an independent Fed raises long-term inflation," St. Onge concluded.
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He mentioned that economists aren't incentivized to share this type of conclusion since "many are paid by the Fed in academic grants."
Wall Street Wouldn't Get As Many Bailouts
St. Onge shared one reason why bond market yields may have dropped amid Cook's firing. He speculates that Wall Street won't receive "automatic bailouts" if the Fed loses its independence. Money printing could be subject to more scrutiny under Trump's control, as any scrutiny is better than none at all. Less money printing translates into lower inflation.
St. Onge also cited quantitative easing as something that would be reduced under a Trump-controlled Fed. He also mentioned a dream scenario that would involve Trump breaking the Fed and letting the economy run itself, similar to how President Andrew Jackson reshaped the American economy to run without the Second Bank of the United States, an earlier central bank.
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Some Investors Want Less Risk
Bond yields only go down when more people buy bonds. If investors believe yields will go down, they may want to lock in today's rates for bonds, CDs, and other fixed-income assets. It seems like investors are betting that interest rates will go down meaningfully if Trump successfully fires Cook and gains control of the Fed.
While investing in stocks amid lower rates can produce solid returns, some investors prefer to minimize their risk and invest in a sure thing. Treasury bonds are some of the safest investments available, but this may be the swansong of high interest rates during Trump's second term.
The Fed will announce its decision on rates on Sept. 17. A rate cut is widely expected, and it may be the first of several. Fed Chair Jerome Powell's term expires on May 16, meaning it will be less than a year before Trump can replace him with a vetted pick.
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