Trump's dismissal of Federal Reserve Board member Cook sparks market concerns, and the US Treasury yield curve steepens.

Due to the announcement by President Trump of the dismissal of Federal Reserve Board member Cook, people have raised doubts about whether the Federal Reserve can effectively control inflation, resulting in a decline in long-term US Treasury bonds and a steepening of the yield curve. The spread between the 5-year and 30-year US Treasury bond yields widened to 116 basis points, the highest level since 2021. As of the time of writing, the 30-year US Treasury bond yield rose to 4.932%, the 20-year US Treasury bond yield rose to 4.898%, while the 2-year US Treasury bond yield fell to 3.717%. The reason for the steepening of the US Treasury yield curve is that the market speculates that Trump will appoint a policy maker who is more inclined to cut interest rates to replace Cook. This move is consistent with Trump's demand for the Fed to take action to relax monetary policy, which may help lower short-term interest rates, but also carries the risk of raising long-term inflation expectations. Nomura's senior interest rate strategist Andrew Ticehurst said, "Trump's dismissal of Cook reminds people that the US government remains non-traditional and unpredictable. The market is worried that the Fed board may be filled with a large number of doves, which could push up term premiums and long-term equilibrium inflation rates. Trading on the steepening US Treasury yield curve seems to be popular, and I think this is understandable in this environment." In a letter posted on social media, Trump stated that he fired Cook because she was allegedly involved in mortgage fraud. Trump also stated when announcing this decision that he has the constitutional power to dismiss Cook. In response, Cook stated that Trump has no authority to dismiss her from the Federal Reserve, and she will not resign. Cook emphasized, "I will continue to fulfill my duty of stabilizing the American economy." Her lawyer pointed out that Trump's request lacks due process, factual basis, and legal authority, and Cook will take all necessary legal actions to resist it. Amid Trump's trade policies and the expanding federal fiscal deficit dampening market sentiment, this latest news further exacerbates the negative sentiment towards US assets. Traders have been looking for safe haven alternatives to the US dollar and US Treasuries all year, and any perception of weakening Fed independence could accelerate this process. Given the latest developments, traders will closely monitor market participants' reactions to this week's Treasury auctions (including 5-year and 7-year Treasury bonds). Trump's dismissal of Cook could have far-reaching economic and political implications. Ousting Cook from the Fed board will provide Trump with an opportunity to appoint loyalists. Trump has stated that he will only appoint officials who support rate cuts. The Federal Reserve Board is the core decision-making body of the Fed, with 7 seats, all nominated by the president and approved by the Senate. Apart from Chairman Powell, the other 6 members, including Fed Vice Chair for Supervision Michelle Bowman and Fed Governor Christopher Waller, were nominated by Trump in his first term. The remaining 4 members were all nominated by former President Biden. Among them, Adrienne Coogle resigned from the Fed board earlier this month. Trump then announced the nomination of White House Economic Advisor Committee Chairman Stephen Millan to fill this vacancy. As S&P Global Ratings recently confirmed the US' AA+ credit rating, the agency warned that if political developments weaken the stability of the US system, the effectiveness of long-term policy making, or the independence of the Fed, this rating may come under pressure. ANZ strategist Rodrigo Catril said, "The dismissal of Cook exacerbates concerns about the Fed's independence being compromised, assuming she has no legal recourse." "If Trump succeeds, this means that there may be four Fed board members who are in line with Trump's position. Whether these members will respect the Fed's independence and adhere to its dual mandate remains to be seen." The US dollar index fell after Trump announced the dismissal of Cook, but regained some of the losses after Cook stated she would not resign. Trump's attempt to strengthen control over the Fed is undoubtedly bad news for the US dollar, which has already endured heavy selling pressure this year. ANZ strategist Carol Kong pointed out that the dismissal of Cook is unfavorable for the US dollar, as it opens the door for Trump to reappoint a new board member more likely to support rate cuts. She added, "This further challenges the independence of the Federal Open Market Committee (FOMC), which is key to supporting the US dollar's safe haven status and could lead to more selling of the US dollar."