At major bond firms including Pacific Investment Management Co. (Pimco), PGIM, and DWS Group, investment managers are warning that Trump's attacks on the Federal Reserve's independence are having the opposite effect of his stated goal to lower interest rates.
They indicate this action is injecting a significant new risk into financial markets by threatening to undermine the central bank's credibility in fighting inflation. As long as this uncertainty persists, traders could keep U.S. Treasury yields higher than they otherwise would be—thereby pushing up the costs of mortgages, corporate loans, and other forms of credit.
"The market is going to get very nervous about the Fed, viewing it as a source of instability," said Gregory Peters, Co-Chief Investment Officer for Fixed Income at PGIM, who manages approximately $900 billion in assets.
He likened the latest twist in the administration's pressure campaign—news emerging Sunday that the Justice Department threatened to sue Fed Chair Jerome Powell—to a soccer player accidentally scoring a goal for the opposing team.
"This is completely unexpected and, without a doubt, a risk-off signal," he said. It represents "another erosion of institutional norms with medium- to long-term implications."
Trump's pressure on the Fed has failed to push bond yields lower.
Trump has repeatedly urged the Fed to cut interest rates more aggressively, arguing that failure to do so would hold back the economy, even though inflation remains above the central bank's target.
He attempted to remove Fed Governor Lisa Cook over her involvement in unsubstantiated mortgage fraud allegations, a case currently pending before the Supreme Court. He also appointed a White House advisor to the Fed board who advocates for significantly more monetary policy easing than his colleagues.
However, despite the Fed resuming rate cuts last September, the yield on the 10-year U.S. Treasury note—a benchmark for mortgages, corporate loans, and other borrowing—has hovered around 4.2%, roughly the same level as at the end of 2024, before Trump took office.
This has become a source of frustration for Trump. Last week, he directed officials to begin purchasing mortgage bonds in an attempt to lower rates and claimed he was ordering banks to cap credit card interest rates at 10% for one year, despite lacking clear authority to do so.
On Sunday, Powell stated that the administration had served the Fed with a subpoena and threatened to sue him over his congressional testimony regarding the central bank's building renovations. Powell characterized this as a pretext for retaliating against the Fed's interest rate decisions and made clear he would continue to act independently for the remainder of his term as Chair, which ends in May.
This pushback was welcomed by investors, who see central bank independence from political pressure as crucial for the stability of the U.S. financial system. This likely tempered the immediate impact of the event, with long-term bond yields rising only modestly by about 2 basis points. Monday's auction of 10-year U.S. Treasury notes by the Treasury Department also saw solid demand, with the final yield slightly below market levels at the time of bidding.
"What's interesting is what didn't happen—the bond vigilantes and yields didn't materially step back and price in a worst-case scenario," said George Catrambone, Head of Americas Fixed Income at DWS.
He compared the market's reaction to the so-called "TACO trade," where traders began buying market dips when Trump announced tariff measures, betting he would not follow through on the harshest threats.
"This administration does not want to push long-term yields higher, and questioning the Fed's independence does exactly that," he said. "So there remains a segment of the market that believes Trump will step back from the red button."
Trump claimed he was unaware of the Justice Department's actions and suggested prosecutors might not proceed with a case against Powell.
But with Trump poised to select Powell's successor, concerns are mounting that a politically aligned central bank could cut rates too low, ultimately fueling inflation.
Even if the Fed reduces short-term rates, this could still push long-term rates higher, as investors demand greater yield to compensate for the risk of their investments being eroded by inflation. It might also prompt overseas investors, key buyers of U.S. debt, to pull back from the market.
"Powell has always deflected questions about political interference before—this time he spoke bluntly and without reservation," said Elias Haddad, Global Market Strategist at Brown Brothers Harriman. "These actions threaten the Fed's inflation-fighting credibility and could accelerate the decline of the U.S. dollar's status as the primary reserve currency."
Elisabet Kopelman, an economist at SEB Bank, stated that open conflict between the Fed and the White House "will not be welcomed by the market." She anticipates that "the risk premium for U.S. inflation and U.S. credit will rise. An increase in the risk premium could also exert upward pressure on long-term yields."
Bloomberg FX Strategist Brendan Fagan noted, "The fact that the bond market held within its recent range despite headlines about Fed credibility suggests buyers may be willing to step in at certain levels. From this perspective, a small additional rise in yields could be seen as constructive, not alarming."
More immediately, given Powell's commitment to defending the central bank's independence, the administration's efforts seem unlikely to influence the Fed's next few rate decisions. In futures markets, traders continue to price in just two 25-basis-point rate cuts this year, unchanged from expectations late last week.
Daniel Ivascyn, Chief Investment Officer at Pimco, said Monday's market reaction shows that investors believe legal and political processes are robust enough to protect the Fed from government pressure.
"What the market expressed today is that there are some concerns—but the overall structure around decision-making is likely to remain solid, and we are not betting against that," he said.
But he added that the risks are evident.
"The market likes certainty, it likes predictability, and it likes key aspects of the Fed's mandate—most notably, the independence of interest rate policy," he said. "Therefore, anything that threatens the independence associated with monetary policy decisions can lead to unintended consequences. Or more simply, you could end up with higher rates."
Comments