Pulling a rubber band
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Article Type
Insights
Topic
Macro
Published
September 11, 2025
Read time
5 mins
Authors
Jordy Hermanns, CFA
Edwin Boon
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The situation

  • President Trump has announced plans to fire Fed Governor Lisa Cook.
  • Under the Federal Reserve Act, the US president may remove a Federal Reserve Board governor only “for cause,” which typically refers to serious misconduct or incapacity.
  • President Trump cited mortgage fraud as the basis for seeking the removal of Governor Lisa Cook, alleging she falsely claimed two separate properties as her primary residence to obtain favorable mortgage terms.
  • We argue that this type of political interference by the Trump administration is a departure from norms.

 

Central bank independence

  • Fed independence was already under pressure in the US. Recent events have taken the political pressure on the Fed to new highs.
  • The concept of independence evolved from early 20th-century efforts to create stable financial systems and control inflation.
  • We argue that from a macroeconomic and market perspective, independent institutions—especially central banks—play a pivotal role in ensuring stability and credibility.
  • Without independence, central banks could be pressured in keeping rates too low, resulting in higher inflation and a more severe tightening cycle to control inflation. 

 

Erosion of institutions

  • In recent weeks, Trump also fired the head of the Bureau of Labor Statistics when her agency reported weak job growth and tried to force out officials at the Federal Reserve when they refused to cut interest rates.
  • The United States is home to the world’s largest economy, most influential financial markets, and the most powerful central bank—the Federal Reserve.
  • US Treasury securities are considered the global safe haven asset, a status built over decades of trust in American financial institutions and governance.
  • This trust is a cornerstone of US financial dominance, supported by the credibility of agencies like the Treasury, Federal Reserve, and regulatory bodies.
  • However, recent political and institutional pressures are testing that credibility, raising concerns about the long-term reputation of the US.
  • If these institutions lose their independence and reliability, the global standing of US financial assets—including Treasuries—could be at risk.
  • We believe this process works like a rubber band. One can stretch the band many times, but at some point the band snaps.
  • The market reaction is interesting:
    • The most obvious place where a reaction can be seen is in the currency market. The USD has depreciated approximately 8% since the start of the year.
    • Risks are not really being priced in equity markets. US equity markets have moved towards record-highs, supported by strong economic and corporate data.
    • Risk markets might even welcome a rate cut – even as a result of political pressure – as this could be another positive factor for equities in the short run.

  • However, we would expect serious repricing when the rubber band snaps.


Market reaction in the US and Europe

  • The market has concerns over the independence of the Fed.
  • Immediately after the news of Trump dismissing Governor Lisa Cook, the US Treasury curve steepened considerably with long-end treasuries selling off nearly 5 basis points.
  • Front-end US treasury yields declined as a more dovish replacement for Cook would likely result in lower policy rates.
    • With Miran recently replacing Kugler’s seat, and with Waller and Bowman already in favor of an increased and speedier rate cut cycle, a fourth dovish member will create an absolute majority in the seven-headed Fed board. 

  • Trump explicitly mentioned that the Fed Funds rate should be at least 200bp below current 4.25%-4.50% boundary.
  • If we see Cook resigning, the chances of more and quicker rate cuts by the Fed increase. However, she did immediately challenge the allegations by Trump, stating yet again that she will not resign. This saga will turn into a test whether Trump can fire officials of “independent” government agencies.
  • The slope of the entire US interest rate curve steepened  by about 6 basis points after the headline from Trump.
    • This brings the 2-30 US curve back to 1.22%, steepest levels since the beginning of 2022, right before the Fed started its post-Covid hiking cycle.
    • Curve steepeners remains the high conviction trade among many investors, as multiple factors that are currently in play can further normalize rates markets.
    • Next to the Dutch pension reform, an aggressive Trump administration, expected economic downturn, partly on the back of the tariffs and the increased fiscal spending from Germany next year in infrastructure and defense, all can push the interest rate curve steeper.

  • In the European rates markets we noticed some spillover effects, mostly in the front-end of the interest rate curve. Where 2-year German rates dropped 4 basis points at the opening today, 30-year bund yields were mildly 2 basis points lower.
  • Where the European Central Bank (ECB) is “almost” done with the current cutting cycle, the US is only getting started.
    • In Europe there is only around a 40% chance of another 25 basis points cut.
    • In the US on the other hand, there are over 5 cuts currently priced in for the coming 12 months by the Fed. And this number might increase with Trumps pressuring the FED Governors. 
Important information

Authors

Jordy Hermanns, CFA
Portfolio Manager

Jordy Hermanns, CFA, is a portfolio manager in the multi-asset group and serves as an investment strategist in the asset allocation team.

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Edwin Boon
Portfolio Manager

Edwin Boon is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.

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