It is almost unheard of for a president to directly dismiss a sitting Federal Reserve governor. This is not merely a 'personal event'; it indicates a fracture in the Federal Reserve system.
Global markets showed little volatility on Tuesday, but it was symbolic—this is volatility born from fears of the Federal Reserve losing its independence.
Market focus is mainly on Trump's dismissal of Federal Reserve governor Cook.
First, let's look at the market's reaction:
- The dollar fell: cracks appeared in the market's trust in the dollar due to concerns that the Federal Reserve may lose its independence;
- The dollar and US Treasuries rose: risk aversion sentiment increased;
- US stocks rose slightly: market expectations for a Federal Reserve rate cut in September increased, with the probability rising from 84% to 87%.
Different markets have different interpretations. From a short-term perspective, the US stock market views Trump's replacement of the governor as making rate cuts easier; while from a long-term perspective, the dollar sees this event as a blow to the credibility and independence of the Federal Reserve, which in turn impacts the dollar.
The overall market feedback has been relatively mild; this does not mean the event is unimportant; on the contrary, it is 'too important, and the market dares not price it.'
First, dismissing a Federal Reserve governor is unprecedented, lacking historical precedent, and no one dares to bet recklessly. As we mentioned in the (Global Market Strategy) this morning: the current market reaction is small, mainly due to 'numbness and fear of pricing.'
· Short-term: An unprecedented event, the market lacks a reference point, so trading can only be done 'based on the most intuitive short-term logic', with the stock market leaning bullish, gold strong, and the dollar weak.
· Mid-term: Risks are actually underestimated. The greater risk is that US Treasury yields may rise due to credit premiums, similar to 'the market demanding higher interest compensation', which the market has not yet dared to trade.
· Long-term: The structural damage to the dollar's credit, the independence of the Federal Reserve has been the cornerstone of the global financial order since the 1990s.
Secondly, the market is still waiting for this event to further unfold (not ignoring it, but waiting): Will the court rule in favor of Cook, or in favor of Trump?
If the former, the independence of the Federal Reserve is temporarily maintained, and overall there is no harm. If the latter, it will be a 'scenario of institutional fractures', where the dollar, US stocks, and US Treasuries will all plummet simultaneously.
The market currently has a mindset of 'temporarily returning to normal', with a short-term sigh of relief, but the risk premium will not completely disappear.