Wall Street Alert: Trump’s Confrontation With The Fed Could Elevate Rates And Threaten Market Stability

Senior fixed‑income managers at major bond houses including Pimco, PGIM and DWS Group have warned that President Trump’s attacks on the Federal Reserve’s independence run counter to his stated objective of lowering interest rates. They contend that efforts to undermine the central bank’s credibility in combating inflation introduce a material new risk into financial markets. As long as this uncertainty persists, traders may demand higher yields on U.S. Treasuries than would otherwise prevail, which would translate into increased costs for mortgages, corporate borrowing and other forms of credit.

Gregory Peters, Co‑Chief Investment Officer of PGIM Fixed Income, who oversees roughly USD 900 billion in assets, said markets are likely to view the Fed as a source of instability and become markedly more risk‑averse. He likened last Sunday’s report that the Justice Department had threatened to prosecute Fed Chair Jerome Powell to an own goal, calling the development “completely unexpected” and a clear signal for risk reduction. Peters warned that the episode represents another erosion of institutional norms with medium‑ to long‑term implications.

President Trump has repeatedly pressed the Fed to implement more aggressive rate cuts, arguing that failure to do so would impede economic growth despite inflation remaining above the central bank’s target. He has sought to remove Fed Governor Lisa Cook over unproven mortgage‑fraud allegations—a matter now before the Supreme Court—and installed a White House adviser on the Fed Board who advocates substantially more accommodative policy than other members.

Although the Fed resumed easing in September of last year, the 10‑year Treasury yield—the benchmark for mortgages, corporate loans and other borrowing—has remained near 4.2%, roughly the same level observed at the end of 2024 prior to President Trump’s inauguration. That persistence has become a source of frustration for the administration. Last week the President directed officials to begin purchasing mortgage‑backed securities to try to push rates lower and asserted he was ordering banks to cap credit‑card interest rates at 10% for one year, despite lacking clear statutory authority to impose such a cap.

On Sunday, Chair Powell disclosed that the government had issued a subpoena and threatened prosecution related to his congressional testimony about renovation costs at the Fed’s headquarters. Powell described the legal actions as a pretext for retaliation over monetary policy decisions and affirmed his intention to preserve the Fed’s independence through the end of his term in May.

Investors welcomed Powell’s stance, viewing central‑bank independence as essential to financial stability, and the immediate market reaction was muted: long‑term Treasury yields rose only about two basis points, and the Treasury’s 10‑year auction on Monday attracted solid demand, with the final yield slightly below prevailing market levels at the time of bidding. George Catrambone, Head of Fixed Income Americas at DWS, observed that the bond market did not materially retrace and that worst‑case scenarios appeared to have been priced in, comparing the response to prior episodes when traders bought dips amid political threats.

The prospect of a politically aligned Fed has heightened concern that policy could become overly accommodative, ultimately stoking inflation. Even if the Fed were to lower short‑term rates, long‑term yields might rise as investors demand higher compensation for the risk that inflation will erode real returns, potentially prompting foreign holders—key purchasers of Treasuries—to reduce exposure to U.S. debt.

Elias Haddad, Global Market Strategist at Brown Brothers Harriman, noted that Powell’s direct comments on political interference marked a departure from his prior reticence and warned that actions undermining the Fed’s credibility could accelerate a decline in the dollar’s reserve‑currency status. Elisabet Kopelman, an economist at SEB, said open conflict between the Fed and the White House would be unwelcome in markets and likely to raise U.S. inflation and credit risk premia, exerting upward pressure on long‑term yields. Brendan Fagan, Bloomberg’s FX strategist, added that despite headlines questioning Fed credibility, bond markets have remained within recent trading ranges, suggesting buyers remain willing to step in at appropriate levels and that modest yield increases may be constructive rather than panic‑inducing.

Market pricing in futures continues to reflect only two 25‑basis‑point cuts this year, unchanged from late last week, indicating traders do not expect immediate policy capitulation. Daniel Ivascyn, Chief Investment Officer at Pimco, said Monday’s market response suggested confidence in the resilience of legal and political institutions to protect the Fed from government pressure, while cautioning that any threat to the central bank’s independence could produce unintended consequences and ultimately higher interest rates.