Quick overview

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President Donald Trump’s decision to fire a central bank governor raised concerns about the U.S Fed’s independence, causing Treasury yields and the dollar to decline on Tuesday

Trump announced on Monday that he was dismissing Lisa Cook as a member of the Federal Reserve Board of Governors because of allegations of improper mortgage borrowing.

She refused to resign, Cook said, and Trump lacked the authority to fire her. She is scheduled to leave office in 2038. Trump’s extraordinary action could trigger a lengthy legal dispute that may fundamentally change the rules governing the central bank’s independence and the role of presidents in monetary policy.

Trump might move more quickly to restructure the Federal Open Market Committee, which sets interest rate policy, if Cook leaves the Fed. Trump has been pressuring the Fed to lower interest rates to stimulate economic growth and reduce borrowing costs.

The yield curve steepened as short-term yields fell due to expectations of a potentially more dovish Fed. Fed Chair Jerome Powell’s dovish signals, labor market weakness data, and a central bank shakeup have all encouraged traders to price in a 25-basis-point interest rate cut at the September policy meeting, despite ongoing inflationary pressures.

Trump has frequently threatened to fire Powell, and this month, he dismissed a senior Labor Department official for allegedly falsifying employment data that disappointed him. Trump has retracted his threat against Powell as his term nears its end in May next year.