Financial markets have been mostly immune to political headline noise in recent months
The White House ratcheted up its efforts to exert more influence over the Fed in August with Trump’s firing of Fed Governor Lisa Cook “for cause”
Jerome Powell’s Jackson Hole speech was more dovish than many expected, increasing the odds of a September rate cut
The month of August is typically a quiet one in terms of financial market activity as vacation season winds down. While there is no shortage of headline noise in the current climate, last month proved to be relatively sleepy in the bond market. Exhibit 1 tracks the range of intra-month Treasury yields in 2025 for various points along the curve, and August was the least volatile since March despite plenty of Fed-related headlines and economic data releases. The month kicked off with a disappointing July jobs report that included a massive -258,000 revision to payroll growth estimates for the prior two months. For the bond market, it meant pricing in an extra 25 basis point rate cut over the next 12-18 months and more fully pricing in a September cut.
Exhibit 1
Source: Bloomberg, ALM First
Speaking of the Fed, the White House’s campaign to exert more influence over the central bank ratcheted up in August. Earlier in the month, FHFA Director Bill Pulte posted a letter he had sent to Fed Governor Lisa Cook alleging mortgage fraud on social media. The allegation involves Cook listing two separate properties as primary residences on mortgage applications, and on August 25, President Trump announced his firing of Cook “for cause.” The Fed governor filed a lawsuit challenging the termination, and the case is expected to land in the Supreme Court. The White House is likely hoping the court will overturn a 1935 decision that largely shields independent Federal agencies from political influence.
If Trump is successful in removing Cook, he would presumably have loyalists in a controlling majority of the Board of Governors, assuming current governors Waller and Bowman fall in that camp given recent rhetoric and policy votes. Of course, there are still four additional votes on the FOMC from the heads of regional Fed banks, so a majority of the Board of Governors doesn’t necessarily mean greater influence over the policy rate. However, they do have control over other initiatives, such as bank regulation, other policy rates (discount rate, IORB), and the approval of reappointments of regional bank presidents. There is a reasonable debate about beneficial reforms at the world’s most influential central bank, but a perceived loss of political independence could have far greater consequences long term.
Financial markets appear to be waiting to see how this all plays out. Equity markets remain hyper-fixated on artificial intelligence advancements. While the Treasury market has at times reacted negatively (yields higher) to these headlines over the last several months, it has been nothing strong enough to cause a change in approach by the White House. President Trump has been clear in his desire for a lower Fed funds rate and the potential benefits to federal budget deficits (interest expense) and the housing market. However, this would also require market perception that inflation was under control. If not, long-end Treasury yields and, consequently, mortgage rates will likely have a difficult time following the overnight borrowing rate lower.
Powell’s Speech & Inflation
In the face of intense pressure from the White House, Powell had remained steadfast in his stance that the Fed should remain patient while they assess more balanced risks to inflation and employment mandates. Fed leaders are generally steadfast in emphasizing that one data release does not alter their given policy position, despite history proving otherwise on many occasions. The July jobs report is the latest example of these exceptions. At the July 30 FOMC press conference, Powell spoke of a solid labor market and inflation running above 2% “even excluding tariff effects.” However, Powell’s tone in Jackson Hole was notably more dovish, touting that “downside risks to employment are rising” and that the “shifting balance of risks may warrant adjusting our policy stance.” The downward revision to the payrolls data in July was indeed severe, but other metrics, such as initial jobless claims and the unemployment rate, suggest that layoffs aren’t happening at an accelerated rate. Hiring activity has clearly slowed, likely a result of heightened uncertainty surrounding trade (and monetary policy). If this uncertainty abates, hiring and overall business investment could accelerate.
If the July jobs report raised concerns about a softening labor market, the July CPI report did the same for inflation risks. Unlike the June CPI report, the July version didn’t show clear signs of tariff-related goods inflation, but core services inflation rose 0.36% m/m, the fastest pace since January. This would seem to run counter to Fed Governor Bowman’s position just prior to the CPI release that the Fed should cut rates because goods inflation will be temporary and that there has been “considerable slowing in core services inflation.” However, the CPI report wasn’t enough to sway Fed Chair Powell from his dovish pivot in Jackson Hole. He didn’t explicitly declare a rate cut would ensue, as he did the prior year, but he certainly pushed the door wide open for such a move. Markets had effectively already priced for this scenario in the wake of the August 1 release of the nonfarm payrolls report, and Powell did nothing to dissuade this thinking.
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