Markets Remain Relatively Immune To Political Headlines, Odds Of September Rate Cut Increase

August is typically a quiet month in terms of financial market activity as vacation season winds down. Although there is no shortage of headline noise in the current climate, last month proved to be relatively sleepy in the bond market with the range of intra-month Treasury yields in August 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 in the next 12 to 18 months and more fully pricing in a September cut.

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 Aug. 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.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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