Treasurys rose and the U.S. dollar weakened as traders sorted through contradictory reports on President Donald Trump’s plans for Federal Reserve Chair Jerome Powell.
Yields on two-year notes, which are particularly sensitive to changes in Fed monetary policy, were about six basis points lower at 3.88% at 2:20 p.m. in New York on Wednesday. A gauge of the dollar’s performance against its peers was down about 0.3%.
The markets largely stabilized by the afternoon after a chaotic hour of trading that began with reports that Trump, in a closed-door meeting, had floated the idea of removing the Fed chair.
Trump himself denied reports that he was planning to fire Powell, but the president has repeatedly criticized the Fed chief’s handling of interest rates, saying he has been too slow to lower borrowing costs.
Powell, for his part, has emphasized the need to monitor the impact of Trump’s tariffs on the economy before easing policy further.
“Just threatening to ‘fire’ him is a bad precedent — it sends a bad message to the market,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “It sends the message that ‘Hey, I’m willing to break all precedent and cross that line to get what I want.’”
The prospect that Trump would remove Powell has fueled speculation that a more dovish successor will take over the central bank and push for rate cuts sooner.
The Bloomberg Spot Dollar Index is on track to snap four sessions of gains. The yen was the biggest beneficiary among G-10 currencies, gaining 0.8% against the greenback.
After stronger-than-expected monthly employment data and signs that inflation remains sticky, traders have ruled out a rate cut at the Fed’s meeting this month. They’re now leaning toward the Fed cutting in September, but it’s seen as far from a sure thing.
Interest-rate swaps suggest traders see a 56% chance of a cut in September, with the next reduction fully priced in by the October meeting.
The moves on Wednesday helped push the yield gap between 5- and 30-year Treasurys briefly to the highest since 2021.
“The first order of business for traders is to bet on a steepening yield curve in the U.S.” in the event Trump fires Powell, said Thierry Wizman, global FX & rates strategist at Macquarie Group. “It’s possible that Trump is testing the waters in the market.”
(Adobe Stock)
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