{"id":227377,"date":"2025-07-16T11:00:00","date_gmt":"2025-07-16T15:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=227377"},"modified":"2025-07-17T03:55:37","modified_gmt":"2025-07-17T07:55:37","slug":"rate-cuts-at-the-expense-of-fed-independence","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/rate-cuts-at-the-expense-of-fed-independence\/","title":{"rendered":"Rate Cuts at the Expense of Fed Independence?"},"content":{"rendered":"\n

This was a \u201crip up the script\u201d morning.  I was working on a piece about the uninspiring reactions to the first two days of bank earnings and how the market seemed to be consolidating its recent gains when a bombshell headline dropped<\/a>: \u201cTrump Likely to Fire Powell Soon, White House Official Says\u201d.  That\u2019s a potential game changer.<\/p>\n\n\n\n

It has been quite evident that President Trump wants to see Powell removed from his position as Federal Reserve Chair.  Markets reacted poorly after the President first expressed his desire to fire Powell a few weeks ago, so it appeared that he then seemed inclined to wait until the Chair\u2019s term expires in May 2026.  The global reaction to the potential diminution of central bank independence was enough to chasten Trump, at least for a while.  But the President has been applying pressure on Powell ever since.  Barely a day goes by without a call for lower rates, sometimes accompanied by an insult.  Furthermore, the investigations into the costs of the Fed\u2019s recent renovation, led by Federal Housing Finance Agency head Bill Pulte, can certainly be interpreted as searching for a reason to fire the Chair for cause. <\/p>\n\n\n\n

The immediate reaction from the bond and currency markets was what we should have expected.  Short-term interest rates plunged on the notion that a new Fed Chair would be far more inclined to cut rates quickly than Powell.  We saw 2-year yields drop by about 8 basis points, but long-term rates rose on fears that aggressive rate cuts might increase inflation.  It is quite fair to expect a steeper yield curve under a less-wary Fed.<\/p>\n\n\n\n

Meanwhile, the dollar fell by about 1% against a basket of major currencies.  It is difficult to untangle the factors that affected the dollar, however.  The most basic reason would be the drop in short-term rates.  All things being equal, lower short-term rates in a particular country depress its currency versus a counterpart where rates haven\u2019t moved.  But there is more to consider when it comes to the dollar recently.  We\u2019ve asserted<\/a> that the general dollar malaise reflects a slow leak out of US assets, notably on days when the dollar falls even as US rates inch higher.  Moves that threaten the Fed\u2019s independence could certainly exacerbate that trend.<\/p>\n\n\n\n

Stocks, however, did little, and the reaction seemed delayed as well as muted.  There are a few possible reasons.  They include:<\/p>\n\n\n\n