Stock markets and bonds sold off after US President Donald Trump said he was dismissing Federal Reserve governor Lisa Cook over alleged mortgage fraud.
Cook, who was accused by one of Trump's housing advisers of falsifying mortgage documents prior to her appointment, has said Trump has no authority to fire her and she will not resign.
Trump sent a letter saying there was "sufficient reason" to believe Cook had made false statements on a mortgage application and so he was removing her from her role as governor with immediate effect.
Cook said she had "no intention of being bullied to step down from my position".
She added that she intends to answer "any questions about my financial history" and is gathering all the information in order to answer questions and provide the facts.
If Cook were to be dismissed, it would open up another seat on the seven-person Federal Reserve board, where Trump is expected to fill with an economist who agrees with his recent statements that interest rates should be cut.
US government bond yields rose overnight, with UK gilts reacting this morning, with the 30-yr bond back above 5.6%, a level it breached in April for the first time in decades and, Bloomberg noted, is close to a 27-year high.
Deutsche Bank strategists highlighted the dollar's kneejerk drop of nearly 0.4% on the news, since largely reversed, while Gold spiked 1% and has held on to most of this overnight gain, while US stock futures were modestly lower and the Treasury curve saw a "sizeable steepening", with the 2yr yield trading -0.7 basis points lower but the 10yr up 2.9bps and the 30yr up 4.5bps to 4.93%.
"This has brought the 2s30s slope to 122bps, its steepest since January 2022 when the Fed had not yet started its post-Covid hiking cycle."
Analyst Ipek Ozkardeskaya at Swissquote Bank said Trump is keeping markets "on edge" by announcing this move, though the fraud allegations are "unlikely to be the real reason Cook is in the firing line".
"She has been outspoken about the inflationary impact of tariffs, warning last June that 'Trump-style tariffs' would complicate the Fed’s job by pushing up prices and forcing policymakers to keep interest rates higher for longer.
"That is precisely the message Trump does not want to hear."
For markets, Ozkardeskaya adds this "reignites concerns about the independence of the Fed, and by extension undermines confidence in the US as the global benchmark for transparent and rules-based capital markets".
The announcement about Cook follows the resignation of fellow Fed governor Adriana Kuegler, and means the Fed is now subject to "intensifying fiscal dominance risks", says Deutsche Bank forex strategist George Saravelos. "What is a bigger surprise to us is that the market is not more concerned."
A professor at Columbia Law School told the FT that Trump's attempted removal of Cook is "unprecedented" and if it sticks, "spells something close to the end of central bank independence in the US".
David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution, warned the newspaper that Trump "seems determined to control the Fed".
The move comes just weeks after Trump fired the head of the Bureau of Labor Statistics following a disappointing NFP jobs report.