Whether it's due to battered spouse syndrome or dumb money, the entire stock market is now one big this is fine meme.

Monday night...

In a sane world, this kind of attack on the Fed would cause market panic.

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— markpalko.bsky.social (@markpalko.bsky.social) August 25, 2025 at 6:39 PM

Tuesday afternoon...
 

 

For months now, we've been talking about the market’s curious lack of reaction to what would normally qualify as ominous or even terrifying economic news. We suggested that the constant battering and uncertainty had created a market psychology that was bizarrely complacent in the face of anything but the most imminent threats. We wondered if the increasing role of retail investors meant that the market was increasingly being moved by dumb money. Whatever the reason, the problems have gotten so bad and the disconnect has gotten so obvious that smart and sober commentators from across the political spectrum have started to raise the alarm.

Allison Morrow (from her newsletter):

 Federal Reserve independence is sacrosanct, the free-market wisdom goes. So why is Wall Street not freaking out about the Trump administration’s campaign to infiltrate the central bank?

 

The answer, in part, is that investors have made a lot of money betting on the idea that Trump will back off, reined in by some combination of the law, advisers who know better, or those mythical market “vigilantes.”

 

It’s a strategy that risks blowing up in their faces.

Federal Reserve independence is sacrosanct, the free-market wisdom goes. So why is Wall Street not freaking out about the Trump administration’s campaign to infiltrate the central bank?

 

The answer, in part, is that investors have made a lot of money betting on the idea that Trump will back off, reined in by some combination of the law, advisers who know better, or those mythical market “vigilantes.”

 

It’s a strategy that risks blowing up in their faces. 

From Marketplace:

“In the longer term, the issue is whether the Fed is able to act independent of executive influence,” said Matthew Paniati, a senior analyst at Capital Advisors Group.

“Because if they can’t, that has very significant macroeconomic implications in my view,” said Paniati.

If people believe the Fed is influenced by a president more than by inflation data, the less faith they have that inflation will be managed well.

“That sends a signal to the bond market that there’s more risk of inflation going forward,” said Kathy Jones with the Charles Schwab Center for Financial Research.

And inflation is an investment killer.

“Investors want to be compensated for tying up their money for longer periods of time, because there’s always some risk that inflation will erode those returns,” said Jones.

So when investors are more worried about inflation, they charge more. They charge higher interest rates in the bond market, which the Fed does not control — it only controls short-term interest rates. The market controls long-term rates, that affect everything from car loans to mortgages to government debt.

“That’s the irony of this whole battle, I think, is that the more the president pushes on the Fed to cut interest rates, the more risk is that long-term rates go up,” said Jones.

It is also possible that concerns over inflation and Fed independence are just peanuts, that this whole brouhaha is ignoring an even bigger risk to long term interest rates.

“The main issue is just the budget deficit,” said Gershon Distenfeld, director of income strategies at Alliance Bernstein. 

He said the government is getting in over its head when it comes to debt, and because of that, investors will charge higher long-term rates. Either way, markets have not panicked just yet. 

“And I think it’s because you’ve had decades of Fed credibility that have kept the market believing that Fed independence is still there,” said Marvin Loh with State Street Markets.

I really should get around to that post on generalizing Minsky moments.

Trump is hostile to the Fed’s independence. He wants to bend the central bank to his will. He is willing to threaten officials with criminal prosecution to get his way. We are in dangerous territory. My @nationalreview.bsky.social column. www.nationalreview.com/corner/the-s... #econsky

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— Michael R Strain (@michaelrstrain.bsky.social) August 26, 2025 at 3:15 PM

More from TNR's Strain:

Eroding central bank independence will make investors, businesses, and households less confident that the Fed will be able to keep inflation low and stable because they will expect that the president will be able to bully the Fed into keeping interest rates lower than is merited, juicing demand and creating inflationary pressure. Higher expected future inflation will put upward pressure on long rates. In addition, the erosion of central bank independence and the willingness of the president to criminalize policy disagreements will increase the perceived risk of holding U.S. Treasury debt. That too will push up long-term interest rates. 

Needless to say, the New York Times recognized the gravity of the moment and rose to the occasion... I kid, of course.

They’re not making the slightest pretense of doing anything but weaponizing a federal agency against Trump’s enemies, and the New York Times’ response is “Well played, sire!”

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— Will Stancil (@whstancil.bsky.social) August 26, 2025 at 2:08 PM

And this bit of understatement.. 

The Federal Reserve Board of Governors has been around for 111 years. In that time it has had more than 100 members (en.wikipedia.org/wiki/Federal...). No president has ever fired (or claimed to have fired) one before.

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— Adam Keiper (@adamkeiper.com) August 25, 2025 at 7:53 PM 

While the stock market was feelin' fine, other financial markets were paying more attention.

(Bloomberg) -- Long-dated US Treasuries fell as President Donald Trump intensified efforts to oust Federal Reserve Governor Lisa Cook, deepening concerns his attacks on the central bank’s independence and lobbying for lower interest rates will fan inflation. www.bloomberg.com/news/article...

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— Carl Quintanilla (@carlquintanilla.bsky.social) August 26, 2025 at 5:47 AM

Dollar, longer-dated Treasuries slide as Trump escalates attack on Fed; gold rises reut.rs/4lE8QAd

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— Reuters (@reuters.com) August 25, 2025 at 10:45 PM

It's really kind of beautiful how his flunkies do these little maneuvers and then he explicitly blows them up less than an hour later. 13:49 *BESSENT: PUBLIC TRUST GIVES FEDERAL RESERVE ITS CREDIBILITY 14:44 *TRUMP: WILL HAVE MAJORITY SHORTLY ON FED

— George Pearkes (@peark.es) August 26, 2025 at 11:46 AM