The fight over the independence of the Federal Reserve has now shifted from rhetoric to litigation. Dr Komal Sri-Kumar, president of Sri-Kumar Global Strategies, warns that the attempted firing of Governor Lisa Cook—and her decision to sue the White House rather than resign—marks a new phase in the struggle between politics and monetary policy.
“The market takeaway is simple,” he writes in his weekly SriKonomics note. “This is a bid to tilt monetary policy even before Jerome Powell’s term as Chair ends in May 2026.”
The arithmetic of the Federal Open Market Committee, Sri-Kumar notes, makes it possible for the President to change outcomes even without ousting Powell. With 12 voting members, a simple majority is enough to set policy. If a bloc of Governors were persuaded that loyalty to the White House was the path to the Chairmanship, rate cuts could be delivered over Powell’s objections.
The immediate effect would be to push down short-term yields. But the longer end of the curve would likely rise as investors demanded compensation for inflation risk and political interference. “That steepening would create a quandary for the administration,” Sri-Kumar explains, “which has indicated repeatedly that it wants lower long-term yields to make mortgages cheaper and to reduce US debt service cost.”
One idea already circulating is Yield Curve Control—administratively capping Treasury yields by buying as much as needed. The concept is not without precedent. During World War II, the Fed capped bond yields at 2.5% to help finance government borrowing. The cap held through the Korean War but collapsed in 1951, when inflation and balance sheet strain forced the Treasury-Fed Accord. Long yields surged, punishing those who had bought into the peg.
More recently, Japan’s experiment with yield curve control has shown the difficulty of maintaining credibility once pressures mount. Every tweak to the target bands roiled global markets. Exiting caps, even gradually, proved disruptive. “An American YCC,” Sri-Kumar writes, “layered atop a huge Treasury issuance calendar and a politically charged assault on the Fed, would likely face even bigger ‘exit’ volatility.”
The irony, he argues, is that the administration’s attempts to push rates lower may have the opposite effect. Markets will demand a higher term premium for inflation risk and for the erosion of Fed credibility. “The surest path to higher mortgage rates and larger long-term US Treasury financing costs,” he concludes, “is to strong-arm the central bank into making near-term cuts.”
The calm under a yield cap would be temporary. History suggests the break could be sudden, with lasting damage to market confidence.
This article quotes views expressed by Dr Komal Sri-Kumar in his weekly SriKonomics commentary. These are his personal opinions and not financial advice. Always consult a qualified adviser before making investment decisions.
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