Trump’s Attempt to Seize Control of the Fed Board… US Yield Curve at Its Widest in Three Years

After firing Cook, who opposed interest rate cuts

30-year rates jump, 2-year notes fall

"Loss of Fed independence could trigger inflation"

As President Donald Trump accelerated his push to control the US central bank (Fed), the spread between long- and short-term US Treasury yields widened to its largest in three years.

According to financial information site Investing.com, on the 27th, the two-year US Treasury yield closed at 3.677% per annum, down 1.42% points from the previous trading day. Meanwhile, the 30-year Treasury yield rose by 0.39% points over the same period, closing at 4.908% per annum. Therefore, the spread between the 30-year and 2-year yields in the US grew to 1.23% points, the highest since January 2022. The Financial Times analyzed, "As concerns over President Trump’s assault on the Fed increased, short-term rates fell, but investors increasingly bet that inflation in the US would be triggered."

President Trump, who has been pressuring the Fed to cut rates, announced on the 25th that he was immediately dismissing Fed Governor Lisa Cook over allegations of mortgage fraud. The next day, Trump said at a cabinet meeting regarding Cook’s successor, "We will be very satisfied with the person who will take that seat (on the board), and very soon we will secure a majority (on the board)," adding "It will be a great thing." The Wall Street Journal forecasted, "David Malpass, former World Bank president, is a strong candidate for the new Fed governor."

The market expects that if President Trump appoints Cook’s successor, four out of the current seven Fed governors would be his appointees. Recently, Trump nominated Steven Mnuchin, former White House National Economic Council director, as a successor to the recently resigned Governor Adriana Kugler, and a successor to Cook is also expected to be appointed.

If the Fed Board becomes dominated by Trump’s appointees, it is expected that the US administration’s control over the central bank will be greatly strengthened. Experts warned that concerns over erosion of the Fed’s independence could push up long-term rates further. Steven Brown, an analyst at Capital Economics, commented, "It is clear the Fed is returning to a much more political world," and projected, "This increases uncertainty regarding rate forecasts and leads to expectations of rising long-term rates." Alan Blinder, former Fed vice chairman and Princeton University professor, said, "President Trump’s moves are clearly an attempt to undermine the Fed’s independence," predicting, "This will lead to economic shock and high inflation."

However, the Fed claims that Lisa Cook remains a valid board member and is resisting Trump’s move, so a legal battle between the two sides is expected. In a statement that day, the Fed said, "We will carry out our duties as stipulated by law."

Donghyun Kim, Reporter 3code@hankyung.com