Federal Reserve power reshuffle impacts US debt, JP Morgan warns: Yield curve may steepen further

Morgan Stanley strategists stated that if US President Donald Trump successfully appoints a key member to the Federal Reserve, the US Treasury yield curve may steepen further from its widest level in four years. On Thursday, the spread between the 5-year and 30-year US Treasury yields widened, following Trump's announcement that he would nominate White House economic advisor committee chair Stephen Moore to fill the vacancy left by the sudden resignation of Fed governor Adrianne Kuegel. This appointment requires Senate approval. Additionally, reports suggest that Fed governor Christopher Waller is likely to replace Jerome Powell as Fed chair. A report released by J.P. Morgan analysts led by Jay Barry on Thursday evening stated, "Moore has long believed that the Trump administration's trade, immigration, and deregulation policies will keep inflation in check. From this perspective, this supports a more dovish policy from the Federal Reserve, and explains the steepening of the yield curve seen today." On Friday, the 30-year US Treasury yield remained steady at 4.82%. US Treasury yield curve may steepen further The spread is currently maintained at slightly above 100 basis points, more than double the level on Trump's inauguration day. Investors are demanding additional premiums to compensate for the uncertainty brought by Trump's tariffs declaration on "Liberation Day" in April and the massive spending bill passed last month leading to increased fiscal spending. A paper co-authored by Moore in March last year called for reforms to the Federal Reserve for better effectiveness. Frederik Romedal, chief strategist at Danske Bank, stated that while Moore's appointment "brings some uncertainty," it will not have a significant impact on the yield curve. He mentioned that factors such as deficits, bond issuance strategies, and the Fed's near-term outlook will be more important. Due to weak job data last week, the market has increased bets on a Fed rate cut. Currently, futures trading predicts a 95% chance of a 25 basis point rate cut by the Fed in September, with at least one more cut before the end of the year. Traders are also waiting for US inflation data to be released next week. Economists expect the inflation rate for July to drop from 0.3% in June to 0.2%. Following the news of Moore's nomination, J.P. Morgan economist Michael Feroli brought forward his expectations for a 25 basis point rate cut by the Fed to September. He remains firm in his belief that the Fed will cut rates three more times in the next three meetings.