Markets Are Fine With Trump’s Grip on the Fed. Look at Them Soar.

Stephen Miran is the first Federal Reserve governor to participate in a Fed rate-setting meeting the day after his confirmation. (Daniel Heuer/Bloomberg)

With Stephen Miran’s confirmation this week as a Federal Reserve governor, the Trump administration took a significant step toward winning control of the U.S. central bank, and the markets are eating it up.

Fed independence was supposed to be a third rail for markets. Signs that the Fed would bend to President Donald Trump’s vocal preference for rate cuts were widely expected to lead to a spike in bond yields and roil the stock market. Instead, the yield on the 10-year Treasury note has been hovering just above 4%, well below its 4.8% peak set in January, while the S&P 500 and Nasdaq on Monday notched their 25th and 26th records for the year, respectively.

The upshot isn’t that Fed independence doesn’t matter. It does. But without some kind of dramatic triggering event—like the surprise tariff announcement on “Liberation Day” in April—the market isn’t likely to react to Trump’s growing influence over the Fed in a way that exacts a political cost on the administration. Instead, the consequences will be more subtle, although they may still take a toll on Americans’ finances.

Miran’s swearing-in as a Fed governor Tuesday morning marks a turning point for the Fed. Trump has appointed Fed officials before, including Chair Jerome Powell, who also won support from former President Joe Biden. But Miran was chosen to fix Trump’s mistake with Powell, which was to assume ideological alignment. Miran, a punchy defender of the president, joins the Fed directly from the White House, where he is now on leave as chair of the Council of Economic Advisers.

Many in the markets are paying attention. The closely watched Bank of America Fund Manager Survey just saw a sharp jump in the number of money managers saying they are worried about Fed independence.

But saying you are worried is one thing. Changing your investment strategy based on those concerns is another.

Miran’s repositioning to the Fed lacks the drama of Trump’s public flirtations with firing Powell. Miran has a mere 136 days to serve in his Fed term, which expires Jan. 31, and is set to participate in just four votes of the rate-setting Federal Open Market Committee, including Wednesday’s.

Despite market rumors, he won’t vote at the September FOMC meeting for a jumbo-size rate drop of three-quarters or a full percentage point. That would signal panic from the administration about a deteriorating economy.

Instead, Miran and his fellow voters on the Fed will give the market what it wants: a return to steady rate cutting that has been on pause since 2024.

“Folks are conflating morality with markets,” says Greg Peters, co-chief investment officer of PGIM Fixed Income. “The markets are focused on—and rightfully—near-term cash flow and what the actual path of the Fed is.”

Nothing that the administration is doing to the Fed currently will make it any more difficult for the profit machines that power the stock market to earn cash. And with the economy set to slow while tariff revenue fills in some of the deficit gap created by the tax-policy law passed this summer, there is little reason for bond traders to demand higher yields to hold long-term government debt.

Trouble, if it comes, will be down the road. The Fed is set to start cutting even as inflation remains above Fed officials’ 2% target and while the labor market remains in reasonably good shape, with the unemployment rate at 4.3%. The Fed is essentially making a bet that it can help the labor market by making it less costly for businesses to invest in expanding, and in a way that won’t spur excessive spending that drives up prices.

The Fed is taking the plunge on tariffs, too, and finally adopting the position that they won’t sustainably raise prices, and thus should be “looked through.”

The hallmark of the Powell Fed is a willingness to read the data and adjust policy. That made it late in catching inflation when it took off after Covid. But the Fed eventually caught up.

Diminished Fed independence will bite if and when the central bank loses its ability to pivot. A Fed that obviously ought to be raising rates might cut them instead, because its members are predisposed to adopt the president’s wish for lower rates.

But the Fed doesn’t determine long-term interest rates, which are set by the market. Investors may react to such a decision by judging that it is risky to hold U.S. debt for long periods when the Fed has lost its appetite to fight inflation. That will send rates higher on maturities such as the 10-year Treasury, which largely determines consumer interest rates on credit cards, mortgages, and auto loans.

It is entirely possible the Fed could cut its policy rate, only to watch the rates that matter most to consumers rise. That happened when the Fed cut in late 2023, writes Ed Yardeni of Yardeni Research in a recent client note: The Fed slashed its short-term rate, only to see the 10-year climb instead of fall.

“The Fed’s credibility is likely to take a hit if the federal-funds rate is cut with inflation remaining relatively troublesome. That could push bond yields higher,” Yardeni writes.

That wouldn’t look like a market rebellion against Trump. But it would keep pressure on would-be home buyers who have been locked out of the housing market by the mix of high prices and high interest rates. Those are people Trump says he wants to help through lower rates. His effort to bring them about may backfire.

That may be the cost of a loss of Fed independence. Just don’t expect the market to demand the bill up front.

Write to Matt Peterson at matt.peterson@dowjones.com