Washington
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Wall Street barely blinked at President Donald Trump’s attacks on the Federal Reserve this year. But its confidence could be shaken with an upcoming Supreme Court ruling.
Trump has launched an intense pressure campaign against the Fed during his second term, frequently demanding interest-rate cuts and threatening to fire Chair Jerome Powell. The central bank has lowered interest rates twice this year, in September and October, and has another opportunity to cut rates in December.
Yet investors remain confident in the Fed’s ability to fight inflation — at least according to measures such as long-term interest rates on US Treasuries and inflation expectations.
Their faith hinges on a Supreme Court case over Trump’s efforts to fire Fed Governor Lisa Cook, a Biden appointee and the first Black woman to serve as a Fed governor.
If Trump wins, the Fed’s vaunted independence to set interest rates without political interference could crumble.
But Wall Street seems to believe the Supreme Court will ultimately opt to keep the central bank independent. Markets also seem to believe that none of the names floated to succeed Powell as Fed chair when his term ends in May pose a threat in that regard, either.
“For now, Wall Street is very comfortable with Fed independence,” said James Ragan, director of wealth management research at financial services firm DA Davidson.
Signs that investors have mostly been unfazed
Just three days after Trump said he fired Cook in August — the first time a president has tried to fire a Fed governor in the central bank’s near-112-year history — the S&P 500 closed at a record high as other major stock indexes pushed higher.
Meanwhile, the yield on the 10-year US Treasury note, a benchmark used for the rates on various loans, has steadily declined since the spring, when Trump began to threaten firing Powell. That means investors don’t see interest rates getting out of control in the next decade, a sign of confidence in the Fed.
Indeed, long-term market-based inflation expectations, which capture Wall Street’s faith in the Fed’s ability to fight price increases, have remained in check throughout the year.
But fears of growing government deficits have driven up so-called term premiums, the extra yield investors demand for holding long-term bonds over shorter ones. Investors say concerns about Fed independence have also played a role — albeit a minor one — in the uptick.
Two decisive moments for the Fed
The court has scheduled oral arguments in late January to determine whether Trump has the power to fire Cook. The president has cited unproven allegations of mortgage fraud. The Justice Department is investigating, but she has not been charged. Earlier this month, Cook’s lawyers said the allegations are “baseless” and urged the department to drop its inquiry.
In a separate case in May, the justices said in an unsigned opinion that Trump could keep Gwynne Wilcox, whom he fired from the National Labor Relations Board, off the NLRB while she continues fighting in court to reverse her termination.
But SCOTUS specifically said that decision doesn’t impact the Fed.
“Markets took a great deal of comfort from that,” Randall Kroszner, a former Fed governor, said at a central banking conference on October 31 hosted by the Peterson Institute for Economics (PIIE). He said investors “believe that the Supreme Court will take a reasonable and balanced approach” in the Cook case.
Investors are also closely watching Trump’s nomination of the next Fed chair. Treasury Secretary Scott Bessent, who has led the search, revealed a shortlist of five people from the White House, the Fed and the private sector. The list includes National Economic Council Director Kevin Hassett as well as Fed governors Christopher Waller and Michelle Bowman.
Bessent told CNBC recently that Trump’s announcement could come 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,” Francesco Bianchi, an economics professor and monetary policy scholar at Johns Hopkins University, said at the PIIE conference.