Rising Risk of Fed Policy Division: Market Worries That Political Pressure Threatens Policy Independence

Source: BlockMedia
Original Title: [New York Bonds] “Is the Fed wavering?”… U.S. Treasury yields rise to 4.19% ahead of rate cut
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The U.S. Federal Reserve (Fed) is about to announce its benchmark interest rate decision, and market concerns about its policy independence are intensifying. Against the backdrop of anticipated rate cuts, U.S. Treasury yields have rebounded, reflecting the market’s cautious sentiment.

According to New York bond market data, the yield on the 10-year U.S. Treasury note rose by 0.020 percentage points to 4.190%. On the eve of the Fed meeting, the market once pushed the yield down to 4.14%, but it then climbed again, showing market wariness.

According to the CME FedWatch Tool, the market sees an 87% probability that the Fed will lower the benchmark rate by 0.25 percentage points to a range of 3.50%-3.75% at this Federal Open Market Committee (FOMC) meeting—a probability that was only 30% just three weeks ago. New York Fed President John Williams’ support for a “precautionary rate cut” has also contributed to this expectation.

However, divisions within the Fed cannot be ignored. Market analysts believe that up to five FOMC members may oppose a rate cut. This would break the Fed’s long-standing tradition of unanimous decisions. Since 1990, there have only been nine instances where three or more dissenting votes occurred at a Fed meeting.

Representatives from global bond departments noted: “The greater the split in opinions, the more likely the market is to question whether the Fed is being influenced by politics. If the benchmark rate policy becomes overly accommodative, the Fed’s very independence could be put to the test.”

The Trump administration’s increasing pressure on the Fed has also sparked concerns about the erosion of policy decision-making independence. The Trump administration has nominated pro-low interest rate individuals to the Fed Board and has recently mentioned the possibility of changing how regional Fed presidents are appointed.

As the possibility of political interference increases, the market’s reactions have become more sensitive. Option premiums related to short-term interest rate volatility have surged, and the yield spread between long-term and short-term rates (10-year vs. 30-year) has widened again. Some global asset management firms are considering adjusting their portfolios to reduce allocations to U.S. Treasuries.

Analysts at Standard Chartered Bank pointed out: “Even if the Fed cuts rates at this meeting, the market may not believe the Fed’s signal. A sudden policy shift caused by political pressure could undermine investor confidence.”

If the Fed does cut rates, the market will focus more on the potential for further cuts in the future, while also paying closer attention to political risk factors, including the selection of the next Fed chair.