The U.S. Treasury yield curve steepened on Tuesday with short-term yields falling and long-term yields rising after U.S. President Donald Trump moved to fire Federal Reserve Governor Lisa Cook from the central bank’s board.
The 2-year yield was more than 5 basis points lower at 3.679%, while the 30-year yield added less than 2 basis points to 4.908%. The 10-year Treasury yield was less than 2 basis points lower at 4.258%. One basis point is equal to 0.01% and yields and prices move in opposite directions.
Investors bet on lower rates in the near future, but higher rates over the long-term after Trump chipped away at the Fed’s independence by announcing the removal of Cook from her position via a post on his platform, Truth Social.
The president cited allegations by Federal Housing Finance Agency Director Bill Pulte that Cook made false statements on one or more of her mortgage agreements.
Cook will sue her removal by Trump, with her attorney saying in a statement Tuesday that the president has “no authority” to do so. Cook had said in a statement Monday evening that Trump “purported to fire me ‘for cause’ when no cause exists under the law, and he has no authority to do so.” Cook, who is the first Black woman to become a Fed Governor, also said: “I will not resign” and that she will continue to serve in her role.
“The President is going to remake the Board Governors of the Federal Reserve over the next year, and he’s doing so in very unconventional ways – we’ve had a resignation and now a termination, opening the door to accelerate this change,” said Jamie Cox, managing partner at Harris Financial Group. “Trump has essentially usurped the Fed’s forward guidance function for the time being and telling markets lower rates are coming, which is being manifest in a steeper yield curve, with short term treasuries dropping like a rock.”
And so investors bet perhaps the Fed would be less attentive to inflation in the future, making ownership of long-term bonds less favorable and sending those rates lower. The U.S. dollar declined vs. various currencies for a similar reason.
Investors also parsed through a raft of economic reports Tuesday. July’s U.S. durable goods orders reading was better than economists polled by Dow Jones had expected. Consumer confidence data for August also came in stronger than expected.
They will now look to the personal consumption expenditures price index, the Fed’s preferred inflation gauge, later in the week for clues as to whether inflation is in a place where it would make sense for the central bank to lower rates, regardless of the political encroachment by Trump.
