Long-dated US government debt sold off on Tuesday as investors worried that US President Donald Trump’s attempted firing of a Federal Reserve governor could undermine faith in the world’s most important central bank.
The sell-off pushed the gap between long and short-term yields close to its widest in three years. Investors are betting that increased political pressure will lead to lower rates in the short term but higher rates in the future as Fed officials are forced to fight higher inflation.
Mr Trump announced on Monday night that he was firing Fed governor Lisa Cook “effective immediately”, citing allegations of mortgage fraud. Ms Cook’s removal would allow the US president to select a replacement more open to interest rate cuts.
The US dollar weakened on Tuesday and two-year Treasury yields fell 0.03 percentage points to 3.7 per cent as investors anticipated downward pressure on the Fed’s policy rate.
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Thirty-year yields rose as much as 0.06 percentage points, with the gap between the two reaching more than 1.2 percentage points – close to a three-year intraday high set in the market turmoil that followed Trump’s “liberation day” tariff announcement in April. Later on Tuesday the 30-year yields eased back, up 0.04 percentage points at 4.93 per cent.
“If successful, this [will be] an important dent in central bank independence,” said Marieke Blom, chief economist at Dutch bank ING. “People pay a high price via higher inflation and higher interest rates when central bank independence is lost.”
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Wall Street bank Goldman Sachs said on Tuesday morning: “We view markets’ response to the headlines as more characteristic of risk-off across US assets, rather than purely a dovish policy shock.”
It added: “Challenges to Fed independence pose clear downside risks to the dollar.”
Investors have grown increasingly uneasy in recent months about Mr Trump’s criticism of Fed chair Jerome Powell, his temporary appointment of Stephen Miran to the central bank’s rate-setting panel and other moves such as the sacking of a top statistics chief.
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Central Bank independence and reliable economic statistics have been cornerstones of developed markets in recent decades, and US Treasuries provide benchmark rates that underpin trillions of dollars of financial assets.
Elizabeth Warren, the top Democrat on the Senate banking committee, accused Mr Trump of making an “authoritarian power grab”, while legal scholars said the White House would have to show in court that there was cause to fire Cook.
“I see actions taken by the White House to pressure and intimidate Mr Powell and Ms Cook as part of a strategy to diminish and ultimately eliminate the Federal Reserve’s statutory independence,” said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments.
Fraser Lundie, global head of fixed income at Aviva Investors, said any government “exhibiting instability of institutional arrangements and at risk of direct political influence” would result in a weaker currency, a steeper government bond curve and a higher so-called risk premium attached to long-dated debt.
The US dollar fell 0.2 per cent on Tuesday against a basket of its peers, including the euro and the pound. The greenback is down more than 9 per cent this year, as Mr Trump’s trade and broader policies have affected the US economic outlook and investor attitudes to the US.
Economists and investors say Mr Trump’s pressure on the Fed is the most prominent example of a new era of so-called fiscal dominance, in which central bank policy becomes more dictated by governments’ need to keep borrowing costs low to service huge debts.
“There is no question in our view that the Fed is now subject to intensifying fiscal dominance risks,” said Deutsche Bank analyst George Saravelos.
“What is a bigger surprise to us is that the market is not more concerned,” he added, saying investors were being “too complacent” about this risk. – Copyright The Financial Times Limited 2025
