PIMCO, PGIM SEE RISK TRUMP’S FED FIGHT WILL DRIVE UP RATES
(Bloomberg) -- At big bond firms like Pacific Investment Management Co., PGIM and DWS Group, money managers warn that President Donald Trump’s assault on the Federal Reserve’s independence is at odds with his goal of pulling down interest rates.
By threatening to undermine the central bank’s inflation-fighting credibility, they say, his administration is injecting a major new risk into financial markets. And as long as it lingers, traders will likely keep Treasury bond yields higher than they otherwise would be — in turn elevating the cost of mortgages, businesses loans and other forms of credit.
“The markets are going to be very skittish around the Fed as a source of instability,” said Gregory Peters, who oversees around $900 billion as co-chief investment officer PGIM Fixed Income.
He likened the latest turn in the administration’s pressure campaign — the news Sunday that the Justice Department is threatening to indict Chair Jerome Powell — to a soccer player accidentally scoring a goal for the rival team.
“This came out of left field and is unambiguously risk off,” he said. It is “yet another fraying of institutional norms with medium and longer-term implications.”
Trump has repeatedly pushed for the Fed to cut interest rates more aggressively, saying the failure to do so is exerting a drag on the economy, even as inflation remains above the central bank’s target.
He has sought to fire one Fed governor, Lisa Cook, over unproven allegations of mortgage fraud in a case that’s pending before the Supreme Court. He also appointed to the board a White House adviser who has advocated easing monetary policy significantly more than his peers.
Yet even though the Fed resumed cutting interest rates in September, the 10-year Treasury yield — the baseline for the price of mortgages, corporate loans, and other types of borrowing — has been hovering around 4.2%, roughly where it was in late 2024, before Trump took office.
That has been a source of frustration for the president. Last week, he directed officials to start buying mortgage bonds in a bid to drive down rates and said he was ordering banks to cap credit-card interest rates at 10% for a year, despite lack of clear authority to do so.
On Sunday, Powell said the administration has subpoenaed the Fed and threatened to indict him over his Congressional testimony about the central bank’s building renovations. Powell said it was a pretext to retaliate for the bank’s interest-rate decisions and made it clear he would continue to act independently during his term as chair, which ends in May.
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The defiance was welcomed by investors, who see the bank’s independence from political pressure as key to the stability of the US financial system. That likely softened the immediate impact, with longer-dated Treasury yields ticking up only around 2 basis points. The Treasury’s auction of 10-year bonds Monday also met with solid demand, resulting in a yield that was slightly below those in the market at the time of the bidding.
“It’s what didn’t happen that was interesting — the bond vigilantes and yields did not materially back up and price in the worst case scenario,” said George Catrambone, head of fixed income at DWS Americas.
He compared the reaction to the so-called TACO trade, when traders started buying the market dips during Trump’s tariff rollouts, wagering he’d not follow through on his most draconian threats.
“The administration does not want to raise long-end yields and creating questions around Fed independence does just that,” he said. “So there is some thought from the market still that Trump will back away from the red button.”
Trump said he was unaware of the Justice Department’s move, and it’s possible that prosecutors won’t bring a case against Powell.
But Trump is poised to pick Powell’s next replacement, which has fanned fears that a politically allied central bank could lower interest rates too far and wind up fueling inflation.
That would likely push up long-term interest rates, even if the Fed lowered short-term ones, as investors demand higher yields to compensate for the risk that their investments could be eroded by inflation. It could also drive overseas investors, who are a crucial buyer of Treasuries, to pull back from the US.
“Powell has always avoided engaging with questions of political interference — this time he spoke with no holds barred,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman. “These actions threaten the Fed’s inflation-fighting credibility and can accelerate the dollar’s declining role as the primary reserve currency.”
Elisabet Kopelman, economist at SEB, said the open conflict between the Fed and the White House “will not be well received by markets.” She expects, “increased risk premiums for US inflation and the credit worthiness of the US. Rising risk premiums are also likely to put upward pressure on longer-dated yields.”
What Bloomberg Strategists say...
“The fact that the bond market has held its recent range despite the Fed credibility headlines suggests buyers may be comfortable stepping in at the right level. In that context, a small additional cheapening could be viewed as constructive rather than alarming.”
—Brendan Fagan, FX Strategist, Markets Live
For the full analysis, click here.
More immediately, the administration’s efforts seem unlikely to impact the Fed’s next few interest-rate decisions, given Powell’s commitment to maintaining the central bank’s independence. In the futures market, traders continue to price in just two quarter-point rate cuts this year, unchanged from late last week.
Daniel Ivascyn, the chief investment officer of Pimco, said the market’s reaction Monday shows confidence that the law and the political process are strong enough to insulate the Fed from the administration’s pressure.
“What the market’s saying today is there’s some concern — but the general structures around decision making will likely hold, and we don’t disagree with that,” he said.
But, he added, the risks are clear.
“Markets like certainty, they like predictability and they like key aspects of the Fed mandate — most notably, rate policy to be independent,” he said. “So anything that threatens independence as it relates monetary policy decisions could lead to unintended consequences. Or put more simplistically, you may end up with higher rates.”
--With assistance from Alice Atkins and Ye Xie.
(Adds closing trading, auction results in 11th paragraph.)
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2026-01-12T19:11:03Z
