Higher Treasury Moves Instigated by Fed's Independence Uncertainty
"Let's Talk Markets!"
Markets saw a surge in Treasury bond prices on Thursday, despite an early dip. The yield on the ten-year note dropped by 4.0 basis points, settling at 4.253 percent. This marked a two-month low for the yield's closing level.
The bond market's strength was largely driven by worries about the Federal Reserve's independence after a Wall Street Journal report suggested President Trump may speed up the process of announcing his pick to succeed Fed Chair Jerome Powell. According to insiders, Trump has considered announcing Powell's replacement as early as September or October, even though the current chair's term extends for another 11 months.
Trump's pressing for a new chair could potentially put pressure on the central bank to follow his bidding. If Trump announces a successor early, it might create confusion in the markets and disrupt the smooth leadership transition.
On the domestic front, the Labor Department reported a decrease in initial jobless claims for the week ended June 21st. The number dipped to 236,000, a decrease of 10,000 from the previous week's revised level of 246,000. Economists had anticipated jobless claims to remain unchanged.
Meanwhile, the Commerce Department revealed that new orders for U.S. manufactured durable goods surged by much more than expected in May. Durable goods orders skyrocketed by 16.4 percent, following a revised 6.6 percent drop in April. Economists had predicted a 8.5 percent increase.
Excluding a significant increase in orders for transportation equipment, durable orders climbed by 0.5 percent in May. The market had expected ex-transportation orders to remain flat.
However, revised data from the Commerce Department showed that the U.S. economy shrank by more than initially estimated in the first quarter of 2025. Real GDP dropped by 0.5 percent, a bigger decline than the previously reported 0.2 percent dip. The decline primarily stemmed from downward revisions to consumer spending, exports, and imports.
Trading on Friday is expected to be impacted by a report on personal income and spending, which includes the Fed's preferred readings on consumer price inflation.
As for the wider market implications, the potential accelerated announcement of a new Federal Reserve chair successor by President Trump is causing market expectations to shift towards easier monetary policy ahead of the normal transition timeline. This anticipation has led to Treasury yields declining and a weakening U.S. dollar.
Equity markets have responded positively, with the S&P 500 hitting a 14-month high amid optimism about potential rate cuts and more accommodative Fed policy. However, this situation also introduces uncertainty and risks, as economists and former Fed officials warn that an early announcement of a "shadow" or successor chair could disrupt the usual transition process and create confusion in markets. The move reflects political pressure on the Fed to adopt a more dovish stance, though it carries risks of destabilizing the Fed’s independence and messaging in a sensitive economic period.
Investors might find it prudent to closely watch the financial implications of the potential early announcement of a new Federal Reserve chair, as this could lead to a shift towards easier monetary policy and potentially impact business operations. The current surge in Treasury bond prices and the subsequent decline in yields suggest that the market is anticipating a more accommodative Fed policy.
