Trump's War on the Fed Isn't Over, and Wall Street Is Still Betting on a Rate Hike

• Removing Cook would give Trump-appointed governors (Warsh, Bowman, Waller) a decisive majority over Biden appointees (Cook, Jefferson, Barr), potentially shifting Fed policy toward cuts despite inflationary data
• Markets now price 64% probability of a rate hike by year-end, with Core PCE at 90.9 percentile, CPI up 0.5% month-over-month, and June FOMC dot plot raising median year-end funds rate projection to 3.8% from 3.4%
• A Fed that cuts to satisfy political pressure while inflation remains sticky could trigger 1970s-style stagflation dynamics, benefiting gold and TIPS while hurting long bonds and unprofitable growth stocks, with the 30-year Treasury already at 4.98%

Summary: Trump's Federal Reserve Battle and Market Rate Expectations

Key Development: President Trump announced plans to pursue the removal of Fed Governor Lisa Cook for a second time, after the Supreme Court rejected his first attempt on procedural grounds. Trump called the Fed board under new Chair Kevin Warsh "a little bit hostile" during a CNBC interview.

Board Composition: The Fed currently has three Biden appointees (Cook, Jefferson, Barr) and three Trump appointees (Warsh, Bowman, Waller). Removing Cook would give Trump a decisive majority favoring rate cuts, though governors' 14-year terms are designed to insulate them from political pressure.

Market Expectations: Despite Trump's preference for rate cuts, markets are pricing a 64% probability of a rate hike by year-end and 76% by December. The two-year Treasury yield sits at 4.10%, well above the current Fed funds rate of 3.62%, signaling expectations of tightening.

Inflation Data: Core PCE (Fed's preferred gauge) hit a 12-month high at 90.9 percentile in May. CPI reached its 12-month peak at 333.979, up 0.5% month-over-month. Unemployment dropped to 4.2% in June, weakening the case for cuts.

Policy Outlook: The June FOMC dot plot shifted median year-end rate projections to 3.8% from 3.4%, with nine of nineteen officials forecasting at least one hike. The Fed has held rates at 3.75% since December 11, 2025.

Market Implications: A politicized Fed cutting into inflation could drive the 30-year yield above its current 4.98%. Duration-sensitive assets including Treasury bonds, mortgage REITs, and regional banks face significant risk. Consumer sentiment hit a 12-month low of 44.8, signaling recessionary conditions. Analysts suggest gold, TIPS, and short-duration credit would benefit from this scenario.