President Criticizes Fed Chairman Amidst Political Tensions, Market Volatility

The President of the United States publicly criticized the Chairman of the Federal Reserve, stating that he was doing a "terrible job." The President also mentioned that regardless of the situation, the Chairman would step down in eight months. This criticism comes amidst ongoing tensions between the administration and the Federal Reserve, with the President frequently expressing dissatisfaction with the central bank's policies. The President's remarks highlight the growing divide between the executive branch and the Federal Reserve, as the latter continues to navigate the complexities of monetary policy in a rapidly changing economic landscape. The President's comments also underscore the political pressures that the Federal Reserve faces, as it strives to maintain its independence and credibility in the face of external criticism. The Chairman's tenure has been marked by significant challenges, including the need to balance economic growth with inflation control, as well as the impact of global trade tensions on the U.S. economy. The President's criticism of the Chairman is likely to fuel further debate about the role of the Federal Reserve and its relationship with the executive branch, as the country continues to grapple with the economic fallout from the pandemic and other global challenges.

In the days leading up to the President's remarks, a fake resignation letter purportedly from the Chairman circulated on social media. The letter claimed that the Chairman had resigned effective July 22. Regulatory sources quickly debunked the letter, pointing out discrepancies in the seal and format that suggested it was generated by artificial intelligence. Despite the swift dismissal of the letter as a hoax, the incident briefly rattled market sentiment, highlighting the heightened sensitivity surrounding the Chairman's future. The Federal Reserve did not respond to the resignation rumors, but the Director of the Federal Housing Finance Agency commented on social media, expressing belief that the Chairman would eventually resign, but not on that particular day. Analysts noted that the fake resignation letter, though proven false, exposed the market's acute concern over the Chairman's tenure.

As market expectations about the Federal Reserve's independence shift, some institutions are adjusting their bond duration structures. A strategy suggested by a strategy expert involves "steepening the yield curve trade"—going long on short-term bonds and short on long-term bonds, betting on a decline in policy rates while inflation and risk premiums rise. The spread between 5-year and 30-year Treasury yields has widened to nearly 100 basis points, the highest level since 2021. As of Tuesday morning, the 30-year Treasury yield was fluctuating around 4.94%. Recent rebounds in consumer inflation data and sustained government spending have intensified market expectations of rising long-term rates. If the Chairman were to leave office prematurely, short-term rates might fall due to reduced expectations of rate cuts, while long-term rates could surge due to increased policy uncertainty. A chief economist noted that market concerns about the Federal Reserve's independence are growing. A market-based forward-looking inflation indicator has diverged significantly from the 2-year risk-free rate, with the former rising more sharply. This phenomenon is seen as an implicit reaction by investors to the potential failure of long-term inflation anchors. Despite these concerns, the Federal Reserve is expected to cut rates by 25 basis points at its September meeting and make three more cuts by the end of the year. The probability of a rate cut in September is around 56% according to rate swap market data. If the current trend of decoupling between expectations and rates continues, the Federal Reserve may become more cautious internally, reluctant to ease policy under political pressure. Beyond the personnel issue, the President's previously set deadline of August 1 for trade talks is also seen as a critical juncture. If negotiations stall or result in a hardline policy stance, it could further disrupt market assessments of the monetary policy path. Since July, the 30-year Treasury yield has surged significantly, breaching the 5% mark for the first time this year. Concurrently, Treasury futures trading volume and volatility have increased, as the market re-prices for a combination of "Federal Reserve policy shift + rising political uncertainty."