Major bond investment firms are warning that the Trump administration's attack on the Federal Reserve's independence is counterproductive to its stated goal of lowering interest rates.
Last Sunday, the U.S. Department of Justice threatened to sue Fed Chair Jerome Powell. Gregory Peters, Co-Chief Investment Officer of PGIM Fixed Income, which manages approximately $900 billion in assets, stated that the markets would become very uneasy about the Fed because such actions could create instability.
He compared the government's pressure campaign to an own goal—where a soccer player accidentally scores against their own team—saying the move would undoubtedly trigger risk-off sentiment, shake institutional norms once again, and have medium to long-term consequences.
Although U.S. Treasury yields moved higher on Monday, they remained well below the panic-induced highs seen earlier in the session, with the 10-year yield edging up by just 1 basis point.
Nevertheless, investment institutions continue to warn that if this uncertainty persists, it will push up the risk premium on long-term rates and could even weaken the U.S. dollar's status as the primary reserve currency. The market is showing temporary resilience, but risks remain. Monday's relatively measured market reaction suggests investors still have confidence that legal and political processes will protect the Fed's independence.
The 10-year Treasury auction saw solid demand, with the awarded yield coming in slightly below the market level at the time of bidding. Bloomberg strategist Brendan Fagan pointed out that despite the news concerning the Fed's credibility, the bond market held within its recent range, indicating buyers might be willing to step in at the right price.
Futures markets show traders still expect only two 25-basis-point rate cuts this year, consistent with expectations from the prior weekend, suggesting the government's pressure is unlikely to influence the Fed's near-term rate decisions in the short term.
Daniel Ivascyn, Chief Investment Officer at Pimco, said Monday's market reaction demonstrates confidence that legal and political processes are sufficient to shield the Fed from government pressure. However, he emphasized that the risks are clear: markets favor certainty, predictability, and the key aspects of the Fed's mission, particularly the independence of interest rate policy. Any threat to the independence of monetary policy decisions could lead to unintended consequences, or more simply, you might end up with higher rates. Threats to Fed independence are sparking market risks. Major bond investors unanimously agree that the Trump administration's assault on the Fed's independence is creating market instability factors. Peters stated that markets will grow very nervous about the Fed as a potential source of instability.
He noted that this pressure would likely keep traders maintaining higher Treasury yields, thereby increasing the cost of mortgages, corporate loans, and other forms of credit.
George Catrambone, Head of Fixed Income at DWS Americas, said the U.S. government's approach is self-contradictory to its goal of lowering long-end yields, explaining that while the administration does not want to push long-term yields higher, questioning the Fed's independence will lead to precisely that outcome.
Markets are still betting that Trump will ultimately back down, similar to the "TACO trade" where traders bought the dip following prior tariff threats. SEB economist Elisabet Kopelman expects that open conflict between the Fed and the White House "will not be welcomed by the market" and will "increase the risk premium for U.S. inflation and credit risk, potentially putting upward pressure on long-term yields."
Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman, added that these actions threaten the Fed's inflation-fighting credibility and could accelerate the decline of the U.S. dollar's role as the primary reserve currency.
Analysis suggests that if investors worry about inflation eroding the value of their investments, they will demand higher long-term yields as compensation, even if the Fed lowers short-term rates. This could also prompt foreign investors, who are key buyers of U.S. Treasuries, to withdraw from the American market.
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