Fed chair Jerome Powell. — Bloomberg
WASHINGTON: The potential ouster of Federal Reserve (Fed) chair Jerome Powell by President Donald Trump will likely drive the 30-year Treasury yield higher by more than half a percentage point, according to Deutsche Bank AG strategists.
The clearest hedge against risks to the Fed’s independence – and a scenario in which US government spending consumes monetary policy – are yield curve steepener trades, a team including Matthew Raskin and Steven Zeng wrote in a note to clients.
These trades benefit if the gap widens between short-term and long-term yields.
Currently, the gap between the five-and 30-year yields is around 100-basis-points (bps) – the steepest since 2021.
At the time of writing, the rate hovered around 4.94%.
“Powell’s dismissal would be meant to produce easier monetary policy and should lift inflation expectations and risk premia,” they wrote.
“The implied moves are big but plausible.”
Attacks on the Fed chair by the president and his allies in the administration, who wish to see the central bank lower interest rates faster than officials are currently projecting, have taken on fresh urgency in recent weeks.
On July 16, when headlines flashed across the wire that Trump was likely to fire Powell – a claim that Trump denied within an hour – US equities, the dollar and long-term US government bonds retreated sharply while short-term Treasuries rallied.
“If it wasn’t for the inflationary impact of tariffs, Powell would likely have already been happy to cut rates.
But the economy is set to be visibly slowing enough in the next few months such that, no matter who is chair at that stage, they will be able to please the President without being seen to appease him,” markets live strategist Simon White said.
Based on the gyrations in Treasuries across the curve seen during that brief time period last week, the 30-year nominal Treasury yield could surge some 56bps, the Deutsche Bank strategists wrote – even as the front end of the Treasury curve rallies on expectations of easier monetary policy in the short term.
The 30-year Treasury has tumbled in July as investors mull over US inflation, the government spending outlook and the path for Fed interest-rate cuts.
Last week’s consumer inflation figures sparked a sell-off that pushed the 30-year yield above 5% for the first time since June.
“Market participants seem to agree that the risk to Fed independence is rising,” wrote Jan Hatzius, chief economist at Goldman Sachs Group Inc, noting that a forward gauge of inflation has decoupled higher from the two-year risk-free rate following a long period of alignment.
“A further increase could make Fed officials more reluctant to cut,” he said. — Bloomberg
