The market participants increased their bets on interest rate reductions on Wednesday after hearing that President Donald Trump was planning to dismiss Federal Reserve Chair Jerome Powell. The market responded rapidly to speculation even though Trump later denied the reports.
The futures market now indicates that interest rate reductions could start in September with another reduction expected before the end of the year. The market participants have become more worried about political influence on central bank decisions.
The president has consistently criticized Powell because the chairman refused to reduce interest rates even when economic indicators indicated weakening conditions. The Supreme Court recently confirmed that the president lacks authority to remove the Fed chair because of policy differences.
The belief that executive power exceeded its limits caused short-term interest-rate futures to rise. The yield curve flattened and the dollar weakened before Trump denied the reports about Fed chair termination.
The market processes current inflation data which indicates consumer prices rose slightly but shows conflicting underlying market forces. The Fed has indicated it needs stronger evidence of economic decline before making any policy changes although some officials have expressed openness to easing.
The Fed’s policy decisions stem from data analysis rather than media headlines despite political pressure that creates market noise.
