Trump risks a 'riot in the bond market' with attempted Cook firing, says Evercore ISI's Guha

Former President Trump's attempt to remove Fed Governor Lisa Cook, which Cook disputes, could grant him a 4-to-3 Fed Board majority if successful, significantly impacting the central bank's independence. This prospect has already steepened the yield curve, as investors anticipate reduced Fed inflation vigilance leading to lower short-term and higher long-term rates. Evercore ISI's Krishna Guha warns markets are underpricing a potential 'Trumpification' of the Fed by 2026, forecasting more rapid rate cuts, a weaker dollar, and a steeper yield curve, with long-term de-rating risks for equities despite any near-term nominal GDP boost.

Analysis

The attempt by former President Trump to remove Federal Reserve Governor Lisa Cook introduces significant uncertainty regarding the central bank's independence, with the potential for a 4-to-3 majority on the Fed Board if successful. This political maneuver is already impacting the U.S. bond market, evidenced by a steepening of the yield curve as investors price in a higher probability of a less data-dependent monetary policy. According to Krishna Guha of Evercore ISI, markets are currently underpricing the risk of a "rupture in Fed independence" by 2026. Guha's baseline forecast includes a Fed that may tolerate tariff-induced inflation and pursue more rapid interest rate cuts. The expected consequences of such a policy shift include a persistently steeper yield curve, higher inflation compensation and risk premiums in long-term bonds, and a weaker U.S. dollar. While equities might experience a short-term boost from policies stimulating nominal GDP, Guha warns of long-term vulnerabilities, including valuation de-rating due to eroding institutional quality and the risk of a severe bond market dislocation.

Key Decisions for Investors

• Investors should consider positioning for a steeper yield curve, as the risk to Fed independence places upward pressure on long-term yields and downward pressure on short-term rates.
• It may be prudent to evaluate portfolio hedges against a weakening U.S. dollar and higher long-term inflation, given the potential for a more dovish and inflation-tolerant monetary policy.
• While equities could benefit in the near term, long-term investors should remain cautious of potential valuation de-rating and heightened volatility linked to the erosion of institutional credibility and bond market instability.
• Monitor developments concerning the Fed Board's composition closely, as changes in leadership or perceived independence are the primary catalysts for the repricing of risk across asset classes.