By threatening to undermine the central bank’s inflation-fighting credibility, the companies said, his administration is injecting a major new risk into financial markets. — Bloomberg
NEW YORK: At big bond firms like Pacific Investment Management Co (Pimco), PGIM and DWS Group, money managers warn that President Donald Trump’s assault on the Federal Reserve’s (Fed) independence is at odds with his goal of pulling down interest rates.
By threatening to undermine the central bank’s inflation-fighting credibility, they said, his administration is injecting a major new risk into financial markets.
And as long as it lingers, traders will likely keep Treasury bond yields higher than they otherwise would be – in turn elevating the cost of mortgages, businesses loans and other forms of credit.
“The markets are going to be very skittish around the Fed as a source of instability,” said Gregory Peters, who oversees around US$900bil as co-chief investment officer at PGIM Fixed Income.
He likened the latest turn in the administration’s pressure campaign – the news last Sunday that the Justice Department is threatening to indict chair Jerome Powell – to a football player accidentally scoring a goal for the rival team.
“This came out of left field and is unambiguously risk off,” he said. It is “yet another fraying of institutional norms with medium and longer-term implications”.
Trump has repeatedly pushed for the Fed to cut interest rates more aggressively, saying the failure to do so is exerting a drag on the economy, even as inflation remains above the central bank’s target.
He has sought to fire one Fed governor, Lisa Cook, over unproven allegations of mortgage fraud in a case that’s pending before the Supreme Court. He also appointed to the board a White House adviser who has advocated easing monetary policy significantly more than his peers.
Yet, even though the Fed resumed cutting interest rates in September, the 10-year Treasury yield – the baseline for the price of mortgages, corporate loans and other types of borrowing – has been hovering around 4.2%, roughly where it was in late 2024, before Trump took office.
That has been a source of frustration for the president. Last week, he directed officials to start buying mortgage bonds in a bid to drive down rates and said he was ordering banks to cap credit-card interest rates at 10% for a year, despite the lack of clear authority to do so.
Last Sunday, Powell said the administration had subpoenaed the Fed and threatened to indict him over his Congressional testimony about the central bank’s building renovations. Powell said it was a pretext to retaliate for the bank’s interest-rate decisions and made it clear he would continue to act independently during his term as chair, which ends in May. — Bloomberg
