Taking things in stride.
Markets are closely monitoring the battle between President Trump and Federal Reserve governor Lisa Cook. Trump said late Monday he would remove Cook amid allegations of mortgage fraud. Cook has dug in, saying she will not resign and that Trump doesn't have the authority to fire her.
There was initially a rise in gold prices and Treasury yields as investors grew concerned about Fed independence.
“If the president were successful, the outcome would be momentous,” JPMorgan strategist Michael Feroli said.
Here's how to think through this as an investor.
First, the Federal Reserve is independent of the US government. If Trump wins this battle, it could go a long way in undermining confidence in the Fed to do its business. That may have ramifications for bond yields and the US economy, given our bloated debt position.
“I have to say that the use of prosecution of one's adversaries, whether it's the FBI visit to John Bolton's home or whether it is the kind of attack that has been launched on Lisa Cook, is, I think, something that should be chilling to many Americans,” former US Treasury Secretary Larry Summers told me on Opening Bid.
“If there's a norm that all kinds of pressure tactics are legal, including bringing the power of law enforcement and investigation and demands for resignation to bear … if that becomes the new norm in American politics … [that] is a very profound threat,” he said.
Summers has been a vocal critic of the Trump administration's policies.
Second, it's clear Trump wants to remake the Federal Reserve to contain more doves — or those who support lower interest rates. Should Cook be dismissed, Trump could soon gain a majority at the Fed, with members he has appointed to the key jobs, as Jerome Powell's term expires next year. That could support higher stock prices in the near term, pros tell me.
“With Stephen Miran nominated for the seat recently vacated by Governor Kugler and with Governors Waller and Bowman dissenting in favour of a rate cut at the July meeting, this would increase the prospects of a dovish majority on the Board,” Deutsche Bank strategist Jim Reid explained.
Third, while this situation is a headline grabber, it shouldn't detract from other areas of focus in the markets. Chief among them is a likely market-moving earnings report on Wednesday evening from Nvidia (NVDA). The AI chip darling comprises 8% of the S&P 500 (^GSPC), and what it posts and says on its earnings call is crucial to maintaining the summer rally.
