The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
It’s quiet.
Despite Trump trying to fire a Federal Reserve Governor, markets didn’t react today. Futures traded off about 10 points during European trading and the S&P traded around flat for much of the day, rallying modestly late. Capital flow today was extremely light at 85%. The Treasury curve steepened today, with the front end dropping and the back end rising.
The steepening of the Treasury curve is a bit of a worry but the magnitude of the move today was small, so it’s a non-event. The worry about the steepening is that Trump’s escalating pressure on the Fed is the beginning of an end to central bank independence in the US. That can of worms can lead to horrible economic outcomes. Before disaster, one would expect lower short-term rates, because that’s what the White House wants *but* back-end rates will climb because the market will expect inflation to eventually rise. Higher back-end rates will also increase the interest expense of the country, which combined with ever-expanding deficits, suggests lower creditworthiness at some point.
The above is not in dispute, by anyone in the market at least. The question that matters is *how much* White House influence over the Fed can the market tolerate before things go from bending to breaking?
That’s it. Today’s reaction is trivial so the market has spoken today. If the market perceives the situation as unacceptable, it’s going to be a financial calamity. There will be no easy undoing of that moment either. The recovery process will be slow and painful. And that will only be possible *after* the fast and painful calamity process. We are far away from that today but nobody knows where the Rubicon lies.
On a quiet day, the attempted firing of the Fed Governor captured the attention of the press and permits investors to think about the consequences, without panic. That said, I don’t think many investors approve of the direction things are going.
I always thought central bank independence was sacrosanct in the US.
Evidently not.
See you tomorrow.
-Mike
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