Bond Traders Hold the Fed’s Line Against Trump

(Bloomberg Opinion) -- First President Donald Trump came for the sanctity of U.S. jobs data. Now he’s challenging the Federal Reserve. Bond traders — at least for now — are taking the latest breach of executive tradition in stride.

Treasuries barely budged Thursday from prevailing levels even after Trump said in a CNBC interview that he’s “not thrilled” that Fed Chairman Jerome Powell is overseeing gradual interest-rate increases. Yields broadly remained near session lows and edged higher after the seemingly inevitable walk-back from the White House that Trump  “respects the independence” of the Fed and that he isn’t interfering with its decisions. Still, he just made his view on interest rates clear.

Here are the relevant parts about interest rates from his interview: 

“I put a very good man in the Fed. I don't necessarily agree with it because he's raising interest rates. I'm not saying I agree with it. I must tell you, I don't. I'm not thrilled because we go up and every time you go up, they want to raise rates again. I am not happy about it, but at the same time I'm letting them do what they feel is best.”

...

“Now I'm just saying the same thing that I would have said as a private citizen. So somebody would say, ‘Oh, maybe you shouldn't say that as a president.’ I couldn't care less what they say, because my views haven’t changed. I don’t like all of this work we’re putting into the economy and then I see rates going up.”

 

The lack of a move in Treasuries speaks to a few things about the bond market as a whole. For one, as Bloomberg News’s Edward Bolingbroke pointed out, investors are generally content about the current level of yields. In fact, the latest JPMorgan Chase & Co. survey revealed that 100 percent of “active clients” reported neutral positions, the first time they’ve all been neutral since January 2011. That tends to reduce the prospect of volatile moves.

Bond Traders Hold the Fed’s Line Against Trump

It also speaks to the comfort that traders have with Powell, now that he’s settled into his role. He just wrapped up two days of testimony in front of both House and Senate lawmakers, and despite his plain-spokenness, he managed to get through it all without upsetting markets in the slightest. He has confirmed time and again that the economy is strong and that the central bank will continue lifting rates gradually. The only wrinkle was saying they would proceed “for now.”

Trump, for his part, must hope that “for now” is a far shorter period than most traders anticipate. The going assumption has been that Fed officials would continue to raise rates gradually — say, once a quarter — until the data clearly showed they shouldn’t. Now, with Trump’s words ringing in their heads, perhaps they’ll become just a bit more sensitive to any data misses.

It wasn’t so long ago that the Fed seemed to look for any reason not to hike. Lately, policy makers have been marching on even with some imperfect data. And that’s to their credit: normalizing under present conditions is the right course of action.

Just as Trump belatedly inserted the word “not” into his Helsinki comments on Russian election meddling, he may have just tried to add “not” back into the Fed’s rate decisions again. At least for now, the markets are betting the central bank won’t be swayed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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