Stocks Are Shrugging Off Trump’s Fed Gambit. This Corner of the Market Isn’t.

Stock markets are focused on Nvidia earnings. That could soon change. (Michael Nagle/Bloomberg)

President Donald Trump’s move to assert control over the Federal Reserve, paired with the trillions of dollars his tax and spending policies are likely to add to the government’s debt, are starting to affect the bond market and could weigh on stocks later this year.

The president’s contested firing of Fed governor Lisa Cook, as well as his relentless pressure on Chairman Jerome Powell to lower interest rates, have raised concern about the central bank’s independence. At the same time, the One Big Beautiful Bill Act will lift overall U.S. debt from just over $37 trillion at present to around $53 trillion by 2035, according to the Committee for a Responsible Federal Budget.

Those two factors—a Federal Reserve potentially more willing to cut interest rates and a government that will have to borrow more heavily to fund itself—add up to a greater risk of inflation. That could erode the value of future corporate profits, the bedrock of share prices and performance.

Yet that has yet to influence stocks, which are now largely powered by growth and earnings from the world’s biggest tech companies and the artificial intelligence investment boom. Short-term Treasury debt, meanwhile, is rallying hard, pushing its yields lower on bets that the Fed will begin cutting its benchmark rate next month.

Yields on benchmark 10-year note yields, last marked at 4.265%, are little changed over the past month.  Longer-dated bonds, however, have been selling off quickly, extending the spread between 2-year notes and 30-year bonds to the highest levels since 2022.

“The front end [of the government bond market] now has Chair Powell on its side, and yields there should stay down,” said ING’s regional head of research, Padhraic Garvey. “The long end is a deep thinker, and can worry about the medium-term risks potentially being taken on inflation.”

Benchmark 30-year paper last changed hands at 4.938%, an increase of nearly 20 basis points, or hundredths of a percentage point, from early August levels. That is significant because a move past the 5% mark, a threshold it reached in late May following Moody’s Investors Service’s decision to strip the U.S. of its triple-A credit rating, triggered a one-week slump of around 2.6% for the S&P 500 .

The change in Treasury market dynamics reflects worries that a Federal Reserve that is compelled to heed the president’s desire for lower rates will ignore inflation risks.

“Undermining the Fed to get lower rates now is like ripping the batteries out of your smoke alarm because it’s beeping,” said Justin Wolfers, an economics professor at the University of Michigan and a senior fellow at the Peterson Institute for International Economics.

“It’s quiet for a bit. Then your house burns down. Credibility anchors expectations; expectations anchor inflation.”

Inflation is already a significant risk. With the president’s new tariff schedule established earlier this month, elevated levies on goods from India unveiled earlier this week and trade talks with China moving at a snail’s pace, higher consumer prices are expected over the coming months.

Pantheon Macroeconomics sees the Fed’s preferred inflation metric, the core personal consumption expenditures price index, rising to 3.2% by the end of this year from 2.8% in July. Pantheon expects it to remain firmly north of the central bank’s 2% target throughout 2026.

Tariff revenue is improving the overall deficit, but the current-year tally is still $1.63 trillion, a 7% increase from the October to July period in 2024.

Sticky inflation, rising deficits, and ballooning debt levels don’t often combine to drive stock markets higher. A Federal Reserve influenced by political pressures won’t make the combination any more palatable.

“Attacks on institutions are insidious. We simply don’t know how robust these institutions are or how these pressures will play out,” said Neil Shearing, group chief economist at Capital Economics. “This is a huge question hanging over the outlook for 2026 and beyond.”

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