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There will be split views on how the Fed would react from March next year. Fed Governor Cook has challenged her removal and has filed a lawsuit to block the firing. Cook’s status at the Fed remains unchanged. The crux of the issue lies with whether Trump can remove Cook before March, where the 12 reserve bank presidents have to be reappointed by the board of governors. If the court rules in Trump’s favour early, Trump would have control over the reappointments and will presumably skew towards dovish candidates. Compared to a week ago, short-term rates are factoring in an extra 25bps of cuts for a terminal Fed funds rate of 3% by the end of 2026.
The outcome is bimodal. If the Fed stays largely independent, there would not be any need to cut more than 4-5 times in the cycle in the absence of a large slowdown. However, if Cook gets removed, there would likely be a kink in rates from next March (FOMC meeting scheduled on March 17/18. A more aggressive rate cut pace (one every meeting) or even jumbo cuts (50bps at a go) may be in the offing in 2Q/3Q 2026. Amidst uncertainties, rates can only weight the outcomes, skewing rates somewhat lower than where they should be. Implied volatility in rates for the period should also pick up as investors hedge against this risk. 
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