Concerns Over 'Politicization of the Fed' Push U.S. Yield Curve to Three-Year High

Concerns about the erosion of the independence of the United States Federal Reserve (Fed) have grown, leading to the widest gap between long- and short-term U.S. Treasury yields in three years.

Lisa Cook, Member of the Board of Governors of the United States Federal Reserve (Fed). Photo by AP News Agency

On August 26 (local time), in the New York bond market, the yield on 10-year U.S. Treasury notes closed at 4.265%, down 1.20 basis points (1bp = 0.01 percentage point) from the previous session. The yield on the 2-year note, which is sensitive to monetary policy, fell by 4.50 basis points to 3.681%. The yield on the 30-year Treasury, which has the longest maturity, rose by 3.00 basis points to 4.921%.

The Financial Times (FT) reported that the yield gap between the 2-year and 30-year Treasuries widened to as much as 1.25 percentage points during the session, marking the highest level in three years. Expectations that the Fed will face pressure to cut rates pulled down the 2-year yield. However, the perception that vigilance against inflation may weaken pushed up long-term yields, according to analysts.

Priya Misra, portfolio manager at JP Morgan Asset Management, stated, "The risk of the Fed's independence being undermined explains the immediate market reaction of a widening yield curve." Stephen Brown, an analyst at Capital Economics, also commented, "It is clear that the Fed is returning to a much more political environment," adding, "This increases uncertainty about the outlook for interest rates and leads to expectations of higher long-term yields."

Goldman Sachs said in an investor memo on the same day, "We believe the market's reaction reflects a broader risk-averse sentiment across U.S. assets, rather than being purely a dovish policy shock."

Donald Trump, the U.S. President who has been pressuring the Fed to cut rates, announced the previous day that he would immediately dismiss Lisa Cook, a Fed Board member facing allegations of mortgage fraud. On this day, he added that he is considering "very excellent candidates" as Cook's successor. If President Trump appoints Cook's replacement, four out of the seven current Fed Board members will have been appointed by him.

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