President Trump has once again escalated his battle against the Fed.
He wants to fire Fed Governor Lisa Cook, but she’s pushing back.
Wondering how concerned to be about yet another Fed conflict? The three indicators outlined below will help.
You’re trying to watch KPop Demon Hunters on Netflix for the 10th time and relax before bed. Then you get the push notification:
“Trump says he’s firing a Fed governor.”
This is tough news to process so late in the evening. You want to finish the movie, but now you’re worried about your money.
Is this going to tick off foreign investors and cause them to dump the US assets you have in your portfolio? That’s what happened back in April, after Trump called for Fed Chair Jerome Powell’s firing. The Dow dropped 972 points in a single day.
Could it also spur a fresh bout of inflation? That’s long been a concern of Fed-watchers who have warned against easing the economy too quickly.
Either way, you’re going to have a hard time sleeping tonight.
But it doesn’t have to be this way. What if you had a handy checklist of market signals to watch, to decide just how worried to be?
Look no further:
(1) The US dollar
The granddaddy of the currency world. The means through which so much global business activity occurs. A source of national pride and joy.
And also a good barometer for how foreign investors are feeling about the US. It’s pretty simple: if they don’t like where things are going, they’ll reduce exposure.
This is exactly what happened on Tuesday, amid the Lisa Cook furor, with the dollar index dropping as much as 0.3%. The same thing happened back during Powell-gate on April 21, when the greenback fell 1%.
(2) The 30-year Treasury yield
While the dollar is a good sentiment gauge, this is more of a reading of inflation expectations.
If investors are starting to get leery of the US’s long-term prospects, they might start shedding long-dated government debt. That, in turn, pushes yields higher.
Further, if inflation does materialize, the Fed’s best weapon for fighting it is rate hikes. Yields also rise in expectation of that.
That’s exactly what happened on Tuesday, with the 30-year yield rising as many as five basis points. Back on the fateful day of April 21, it spiked double that amount.
So watch the 30-year. The more it sharply increases, the more worried to be.
(3) Stocks
This is perhaps the most obvious signal. Nothing expresses investor dissatisfaction more than a good, old-fashioned stock sell-off.
If investors don’t like what Trump is doing, they let the equity market do their talking for them. And because it’s the most high-profile asset, it captures all the headlines.
As mentioned above, stock traders have rebelled occasionally in response to anti-Powell headlines. Interestingly enough, this wasn’t the case on Tuesday, with the S&P 500 actually inching higher after a negative open. Out of the three indicators, this is the strongest that the market isn’t particularly worried about the Lisa Cook situation.
Tuesday’s trading session has had none of the selling vitriol of past Trump-Fed conflicts, suggesting that investors either think the firing won’t go through, or that the impact of Fed independence will be minimal if it does.
Going forward, it’s most useful to view these three signals in tandem. Just watch out if they’re all flashing at the same time.
Read the original article on Business Insider
