Trump's pressure on the Federal Reserve ignites market concerns, inflation expectations soar to a six-month high
Trump's pressure on the Federal Reserve has intensified, raising market concerns about inflation expectations, with the 10-year breakeven rate rising to a six-month high of 2.46%. Although the U.S. Treasury market remains relatively calm, investors are increasingly worried about presidential interference in central bank decisions. Analysts point out that if the Federal Reserve cuts interest rates too early, it may weaken its ability to control inflation. The yield on inflation-protected securities has fallen to a four-month low, indicating an increased demand for risk hedging
The Zhitong Finance APP noted that despite Trump's increasing criticism of the Federal Reserve, the U.S. Treasury market remained relatively calm this week. However, the further rise in inflation expectations indicates that investors' concerns about the president's attempts to interfere with central bank decisions are deepening.
The 10-year breakeven rate (the yield difference between Treasury bonds and inflation-linked bonds) reached a six-month high of 2.46% on Wednesday, before falling back to 2.41% on Friday. This fluctuation was due to the yield on Treasury Inflation-Protected Securities (TIPS) dropping to a four-month low of 1.81%, as demand for risk hedging increased.
This move comes as the U.S. president urges Federal Reserve policymakers to lower borrowing costs, raising market concerns that premature rate cuts could undermine the central bank's ability to control inflation. The nominal 10-year yield is expected to remain flat this week, with a slight increase of 2 basis points to 4.22% on Friday, staying at the lower end of the volatility range seen in August.
Since April, as Trump imposed tariffs on trade partners and the stock market rally eased financial conditions, bond investors' inflation expectations have continued to rise, gradually approaching this year's peak of 2.52% set in February.
This trend accelerated as Trump continued to pressure Federal Reserve Chairman Jerome Powell to cut rates and escalated his attacks on the central bank on Monday—attempting to fire Federal Reserve Governor Lisa Cook. Cook has filed a lawsuit to stop Trump's "illegal attempt" to dismiss her.
Megan Swiber, a rate strategist at Bank of America, stated: "The breakeven rate still has room to rise, as investors are hedging against the risk that the Federal Reserve may lose some of its independence. Aggressive rate cuts in the face of high inflation and a strong labor market would lead to policy missteps by the Fed."
She expects the 10-year breakeven rate to rise to 2.55%. This indicator has increased by 3 basis points this month, hovering near the upper end of the 2%-2.5% range seen over the past two years.
Despite relatively small fluctuations this week, the steady rise of this indicator is one of the most tangible signals indicating that investors are increasingly worried that Trump's attacks on the Federal Reserve could undermine the central bank's credibility in combating inflation.
If the government successfully appoints another Federal Reserve governor after Stephen Milan (and possibly exerts influence through regional branches), the Federal Reserve Board could ultimately be dominated by officials appointed by Trump.
In recent weeks, long-term bonds have underperformed short-term bonds, with the yield spread between 30-year and 5-year Treasury bonds widening to its highest level since 2001. This spread further widened after Powell opened the door to rate cuts at the Jackson Hole central bank symposium last week.
Gang Hu, managing partner at Winshore Capital Partners, stated: "The market is pricing in a potential policy paradigm shift, where the government will push for an overheating economy."
