Markets are shrugging off Donald Trump’s attempt to fire Federal Reserve governor Lisa Cook. Economists warn the strain is nonetheless showing in long-term U.S. rates and the dollar, raising questions over how long investors can keep ignoring political lawlessness.
“Ironically, this clown show stuff is likely to backfire,” says Dean Baker, senior economist and cofounder of the Center for Economic and Policy Research (CEPR). The administration may think it is paving the way for lower rates by trying to sack Fed governor Lisa Cook, but Baker argues the opposite is true.
“Trump may ultimately get the board majority he needs to support lower rates, but long-term rates are likely to stay high or rise more since investors are going to be less likely to put their money in a ‘shithole country’,” he said.
The president has accused Cook of “deceitful and potentially criminal conduct in a financial matter,” citing mortgage transactions that had already been reviewed during her Senate confirmation. Cook rejected the move as unlawful and vowed to remain in office while filing a lawsuit to block Trump’s dismissal attempt.
“His attempt to fire her, based solely on a referral letter, lacks any factual or legal basis. We will be filing a lawsuit challenging this illegal action,” Cook’s lawyer, Abbe Lowell, told journalists on Tuesday.
So far, markets have barely reacted. Trump’s move was greeted with a mild steepening of the U.S. Treasury yield curve as yields on two-year notes (sensitive to near-term Fed policy expectations) fell slightly more than longer-dated 10-year notes that are sensitive to inflation risks. But Baker says investors should look closer: the stress is already visible in the U.S. bond market.
The spread between 30-year and 10-year Treasuries is now more than 60 basis points, compared with a historical norm below 20. The widening spread reflects investors demanding a premium for what they see as eroding political stability in the United States. “The country isn’t Argentina tomorrow, but it’s moving in that direction,” Baker told Investment Officer.
Treasuries demand a premium
Baker warned that the erosion of confidence will ripple through asset classes. “We’ll definitely see higher term premiums,” he said. “There will be a further drop in the dollar. The 9.5 per cent decline of the dollar-index we’ve seen so far this year is worse than it looks, since we expect tariffs to push the dollar higher.” Asked which assets might benefit most, he said it would depend “on which economies adjust best to a world beyond dollar hegemony.”
Stretching the rubber band
At Aegon Asset Management, portfolio managers Jordy Hermanns and Edwin Boon likened Trump’s interference with the Fed to a rubber band. “One can stretch the band many times, but at some point the band snaps,” they wrote in a client note.
Trump has been explicit that he wants policy rates at least two percentage points below today’s 4.25–4.50 per cent range, and a dovish successor to Cook would give the rate-cut camp a working majority on the seven-member board. Adriana Kugler, a Biden appointee who joined the Fed in 2023, recently stepped down and was replaced by Trump loyalist Stephen Miran, while Christopher Waller and Michelle Bowman are both leaning toward a faster easing cycle.
The danger, Hermanns and Boon warned, is what happens when the rubber band finally does snap. A structural break in Fed independence would trigger a violent repricing of assets once investors conclude that U.S. institutions can no longer be relied upon.
‘Political retribution’
The Supreme Court ruled in May that presidents can remove leaders of independent agencies without cause, but added that the Fed was “a uniquely structured, quasi-private entity.”
Kenneth Manusama, a scholar of American constitutional law, believes Trump is unlikely to prevail in court. “This is political retribution, a fabricated case designed to control the Fed,” he said. “The Supreme Court won’t let him fire her.”
Peter Conti-Brown, a historian of the Fed at the University of Pennsylvania, noted that the mortgage transactions at the heart of Trump’s allegations predated Cook’s appointment and had already been vetted during her Senate confirmation.
“The idea that you can then reach back, turn the clock backward and say all these things that happened before now constitute fireable offenses is incongruous with the entire concept of ‘for cause’ removal,” he told Reuters.
The expectation that the court won’t budge appears to be shared by markets: investors remain calm, assuming the legal system will hold. Betting markets also remain unconvinced. Polymarket and Kalshi put the odds of Cook’s actual removal at no more than 29 per cent.
Trump told reporters on Tuesday that he would respect whatever decision the courts reach on Cook’s future at the Fed.