Why the Market Is Shrugging Off Trump's Fed Challenge

President Trump's unprecedented move to potentially remove a Federal Reserve governor hasn't triggered the market panic one might expect. The 30-year Treasury yield initially ticked up a mere 0.05 percentage point, then pared those gains. Investors, it seems, are largely unfazed.

Many seasoned commentators believe the market *should* be more worried. However, there are several sound reasons why this muted reaction is justifiable, alongside one underlying concern worth noting.

Five Reasons Not to Panic

1. It's Already Priced In: Given Trump's repeated verbal assaults on the Fed, his attempt to oust a governor accused of misconduct comes as little surprise. His desire for lower interest rates is an open secret, and anyone worried about him undermining the Fed's independence likely already harbored those concerns. The announcement of Lisa Cook's potential removal adds little new information.
2. Trump's Eventual Control: Trump has already appointed three Fed governors, with another nominee awaiting approval. Furthermore, current Fed Chair Jerome Powell, originally appointed by Trump, may leave his chairmanship upon the expiration of his term, further solidifying Trump's influence on the board.
3. Cook's Refusal to Go Quietly: Cook maintains Trump lacks legal grounds for her removal, potentially setting the stage for a legal battle. If the courts side with Cook, it will demonstrate the U.S. system's ability to check White House power.
4. Less Pressure on Powell: With the focus shifting to Cook, the pressure on Powell, previously the target of Trump's ire, will lessen. Within the Fed system, policymakers rarely vote against the chair, making Powell's position far more crucial to investors than Cook's.
5. Trump's Appointees Aren't Puppets: There's little evidence to suggest Trump's appointees are mere "yes-men." While some have voted for lower rates, this isn't necessarily an extreme position, especially given the evolving economic outlook.

The Underlying Worry

However, this shouldn't breed complacency. Investors concerned about the Fed's eroding independence might consider betting on lower short-term interest rates and higher long-term bond yields due to inflation concerns.

The market often relies on the assumption that Trump will retreat from extreme actions if they trigger significant sell-offs. But this hinges on that pattern continuing. Should Trump take more drastic steps, such as appointing an unqualified individual to lead the Fed, it could trigger a substantial negative market reaction.

So far, there's little indication this will happen, but for those worried about the loss of Fed independence, this strategy offers a potential way to profit from that risk.