Trump’s Latest Fed Attack Hasn’t Shaken Markets. That Doesn’t Mean It Isn’t Risky.

President Donald Trump (left) has been pressing Federal Reserve Chair Jerome Powell to cut interest rates for months. (Getty Images)

Carl Sagan’s logical principle, summarized as “absence of evidence isn’t evidence of absence,” neatly describes the current market reaction to President Donald Trump’s latest assault on the Federal Reserve.

The president’s effort to remove Fed governor Lisa Cook, based on accusations of mortgage fraud levied by a Republican official in the Federal Housing Finance Agency, has yet to elicit big moves in stocks, bonds or the dollar.

But that doesn’t mean investors aren’t growing increasingly concerned over his erosion of Fed independence or the blurring of lines between government and enterprise that have characterized his second term in office.

Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, said that even with evidence that suggests Cook may have made false mortgage statements, “she was likely targeted in order to remake the Fed with people who will be most inclined to cut interest rates.”

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, fell by around 0.6% in overnight dealing after Trump posted a letter that said he was firing Cook. She said he didn’t have the legal right to do so.

The currency’s decline steadied in early Tuesday trading, perhaps as a result of parliamentary turmoil in France and the resulting weakening of the euro, the biggest weight in the dollar index.

Bond markets are showing at least a modest level of concern for the latest attack on the Fed’s independence, but their moves are largely an extension of a trade that has been developing over the past two weeks. Longer-dated bond yields, which are more influenced by inflation worries, are rising, while yields on shorter-dated paper, which is more closely tied to Fed rate projections, are falling.

Stocks are only slightly weaker, still sitting on a solid August gain ahead of Wednesday’s crucial second-quarter earnings update from Nvidia . Early Tuesday, futures on the S&P 500 were marginally lower.

The muted reaction could be tied to a host of questions tied to Cook’s firing, including whether she has actually been dismissed. Cook herself has said she won’t resign.

“The real story here isn’t about Cook, or mortgages,” the Nobel economist Paul Krugman said in a post online on Monday. “It’s about the way the Trump administration is weaponizing government against political opponents, critics, or anyone it finds inconvenient.”

Little is known about who the president will attempt to replace her with, and whether this will tip the balance among the seven members of the Fed’s Board of Governors that vote at each policy meeting toward a bias for lower interest rates. The president of the Federal Reserve Bank of New York also votes at all meetings, while four presidents of regional Fed banks get votes on a rotating basis.

Markets have already rallied on two separate occasions over the past month in anticipation of a September cut. Their most recent jump came in response to Chairman Jerome Powell’s Jackson Hole speech last week.

But the risks ahead are real.

“The Federal Reserve Board is in transition and increasingly shaped by Trump,” said Ed Mills, Washington policy analyst at Raymond James, in a note published Tuesday. “If Cook’s removal holds and Powell resigns after his chair term, Trump could appoint up to five of seven governors, cementing a durable majority.”

Thomas Matthews, head of markets, Asia Pacific, at Capital Economics, says the greater threat to markets would be if the president’s recent Fed meddling led to the “permanent undermining” of its independence or even a playing down of its inflation mandate. The bank currently targets an inflation rate of 2%.

“The stakes are high,” he said. “And with these moves happening in the context of broader attacks on the credibility of U.S. institutions, investor confidence in the Fed’s independence shouldn’t be taken for granted.”

ING’s global head of markets, Chris Turner, warned that higher yields on long-dated bonds will weigh on the dollar, and “pressure global equities after a good run in August.”

Sagan’s writing included a reference to “impatience with ambiguity,” referring to humans’ desire to find immediate answers to difficult questions. Markets, not always seen as patient, aren’t providing a clear response to Trump’s Fed gambit just yet.

But that doesn’t mean it isn’t being factored in.

Write to Martin Baccardax at martin.baccardax@barrons.com