Market expects the Supreme Court to defend Fed
Market showed little reaction to President Donald Trump’s criticisms of the Federal Reserve this year. However, its confidence may be tested by an impending Supreme Court ruling. During his second term, Trump has initiated a vigorous pressure campaign against the Fed, consistently calling for interest-rate cuts and issuing threats to dismiss Chair Jerome Powell. The central bank has reduced interest rates on two occasions this year, specifically in September and October, with another chance to implement a rate cut in December. Nevertheless, investors continue to express confidence in the Fed’s capacity to combat inflation — as evidenced by indicators like long-term interest rates on US Treasuries and inflation expectations. Their faith is contingent upon a Supreme Court case regarding Trump’s attempts to dismiss Fed Governor Lisa Cook, a Biden appointee and the first Black woman to hold the position of Fed governor.
If Trump wins, the Federal Reserve’s esteemed autonomy to determine interest rates free from political influence may be at risk of collapse. However, market appears to have confidence that the Supreme Court will ultimately choose to maintain the independence of the central bank. Markets appear to be confident that none of the candidates mentioned to replace Powell as Fed chair when his term concludes in May present a risk in that respect, either. “For now, Wall Street is very comfortable with Fed independence,” stated James Ragan. Just three days after Trump stated he had fired Cook in August — marking the first instance of a president attempting to dismiss a Fed governor in the central bank’s nearly 112-year history — the S&P 500 closed at a record high, with other major stock indexes also rising.
Meanwhile, the yield on the 10-year US Treasury note, a benchmark used for the rates on various loans, has consistently decreased since the spring, when Trump began to threaten firing Powell. Investors are signaling that they do not anticipate interest rates spiraling out of control in the coming decade, reflecting a sense of confidence in the Federal Reserve. Indeed, long-term market-based inflation expectations, which reflect market’s confidence in the Fed’s capacity to combat price increases, have stayed stable throughout the year. However, concerns regarding increasing government deficits have led to a rise in what are known as term premiums, which represent the additional yield that investors seek for holding long-term bonds compared to shorter-term ones. Investors indicate that worries regarding the independence of the Fed have contributed, though to a lesser extent, to the recent increase.
The court has set oral arguments for late January to assess whether Trump possesses the authority to dismiss Cook. The president has referenced unverified claims of mortgage fraud. The Justice Department is conducting an investigation; however, she has not faced any charges. Earlier this month, Cook’s lawyers asserted that the allegations are “baseless” and called on the department to discontinue its inquiry. In a separate case in May, the justices stated in an unsigned opinion that Trump could keep Gwynne Wilcox off the NLRB while she continues her legal battle to reverse her termination. However, the Supreme Court explicitly stated that this decision does not affect the Federal Reserve. “Markets took a great deal of comfort from that,” said Randall Kroszner. He stated that investors “believe that the Supreme Court will take a reasonable and balanced approach” in the Cook case. Investors are paying close attention to Trump’s nomination of the next Fed chair. Treasury Secretary Scott Bessent, who has spearheaded the search, disclosed a shortlist of five individuals from the White House, the Fed, and the private sector, featuring Kevin Hassett, Christopher Waller and Michelle Bowman. Bessent stated that Trump’s announcement could arrive around Christmas. “Markets still seem to be fairly confident Fed independence will prevail, and I think this is in part because of the names that we saw for Fed chairman were reasonable,” said Francesco Bianchi.
