'People just have gotten kind of numb to it all,' says RBC's Gwinn
by Maria Eloisa Capurro and Liz Capo McCormick
President Donald Trump’s power grab at the Federal Reserve has sounded alarms across the monetary policy world – but not in one corner of the bond market where they might have made a difference.
Investors aren’t pricing in higher inflation for the US, the one big danger that experts see looming when central-bank independence gets eroded. Market-based measures of price pressures are down from July peaks, and roughly in line with their two-year average. Medium- and long-term gauges are within shouting distance of the Fed’s 2% target.
That’s despite unprecedented moves by the administration to gain influence over interest rates. Trump has escalated his battle to fire a Fed governor to the Supreme Court, after months of demanding lower borrowing costs and hinting he could dismiss Chair Jerome Powell. His team has called for a sweeping overhaul of the central bank and suggested it should be helping to lower government debt costs, a task that’s outside its mandate.
Trump has backed off in the past from policy moves that made investors nervous, like after his tariff rollout in April. But there’s been no such market upheaval on the Fed front, where confidence that US central bankers will be able to keep prices stable appears to be unscathed.
“For markets, maybe it’s not enough to talk theoretically about what Fed independence means,” says Blake Gwinn, head of US rates strategy at RBC Capital Markets.
With so many potential risks flying around the headlines, “people just have gotten kind of numb to it all, and it’s like you kind of wait until you actually see the thing,” Gwinn says. In the Fed case, that would mean “decisions that are problematic from a long-run inflation standpoint.”
The Fed last week lowered rates for the first time in 2025, but signaled it’s still mindful of inflation risks and will proceed cautiously. Trump’s newest appointee to the Fed board, Stephen Miran — who wants to move much faster — remains an outlier.
There’s little evidence that US consumers fear a price spiral. In a much-cited New York Fed survey, estimates for inflation three and five years ahead have been hovering around 3% for months.
As for the bond market, one measure of the five-year inflation outlook half a decade from now — closely followed by policymakers as a way to look through demand and supply shocks — stands at around 2.3%. The Fed’s own gauge gives a similar reading.
‘Kind of a Puzzle’
“Remarkably steady” inflation breakevens suggest investors believe that a “more normal process” of conducting monetary policy will prevail despite all the current noise, said James Clouse, an economist at the Andersen Institute and former deputy director at the Fed’s division of monetary affairs.
That might be because Trump’s Fed picks will discover that their fellow voters on the rate-setting committee are hard to win over, Clouse says. Still, the market calm has been “kind of a puzzle.”
It’s certainly baffling to many central bank watchers. The bedrock case for independence, based on worldwide studies, is that it delivers lower inflation. Analysts cite cautionary tales, especially from emerging markets, showing that political attacks tend to spark a sharp rise in price expectations.
Whether such a scenario could play out in the world’s biggest economy is “the new thing that the market’s trying to get their head around,” says Tim Magnusson, chief investment officer at hedge fund Garda Capital Partners. He, along with many others, isn’t buying it: “I don’t think we’re going down that road.”
To be sure, there are some signs that investors are at least mildly troubled about inflation becoming unmoored under a politicized Fed.
The growing spread of long-term Treasury rates above those with shorter maturities — so-called curve steepening — has been at least partly caused by worries over Fed independence and inflation, though there are other drivers too including concern over the historically large US budget deficit.
Hedging of dollar exposure has been on the rise this year, bringing record inflows for assets in emerging markets and advanced economies outside of the US. Still, there’s only so far market participants can go to safeguard from Treasuries, which are outperforming global peers. Holding a contrarian view that the Fed will bend to pressure and let inflation risks out of the bag can be costly, investors warn.
‘What They Know’
For money managers trying to assess the risk of political interference in US interest rates, there aren’t many guideposts. It’s a problem they haven’t really had to think about since at least the 1970s.
“Markets are simply pricing what they know,” says Steven Blitz, managing director at TS Lombard. “And what they know is a presumption that things are basically going to operate going forward the way they pretty much operated in the past.”
It’s also tough to tease out any impact of political pressure on Fed decision-making, at a time when job-market weakness is nudging the central bank toward rate cuts anyway – albeit not on the scale Trump wants.
So long as markets are in seeing-is-believing mode, it might take a sharper shift in the central bank’s approach to get them worried – perhaps after a Trump-picked successor takes over from Powell, whose term as Fed chief ends in May. If inflation is picking up and a new chair pushes for rate cuts anyway, that could steepen the yield curve and lift price expectations sharply, some analysts warn.
“It’s often speed not direction that sort of checks their behavior,” says Mark Spindel, chief investment officer at Potomac River Capital.
Unless or until that happens, US central bankers likely can’t count on the markets to deter Trump from his Fed overhaul.
“The signal I’m taking is a bad one, which is that the Trump administration has a lot more room,” said Derek Tang, an economist at LH/Meyer Monetary Policy Analytics. “Because there’s no pushback, I think that the administration will keep pushing and pushing.”
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