The ‘Boiling Frog’ Playbook: Why Wall Street’s Relief Over the Fed Is Premature

TradingKey - President Donald Trump’s direct move to fire Federal Reserve Governor Lisa Cook has sparked intense debate on the politicization of the Fed, with The Wall Street Journal declaring the potential “end of Fed independence.” While long-term U.S. Treasury yields reacted immediately, U.S. equities appeared unfazed — analysts warn this calm masks a deeper, slow-burning risk, likening it to the “boiling frog” parable.

On Tuesday, August 26, major U.S. equity futures dipped before the market open amid concerns over the Fed’s independence. Yet, all three major indices closed higher, with the S&P 500 up 0.41% — raising questions about whether the “firing Cook” episode is truly as damaging as economists have warned.

Solid corporate earnings and the impending Fed rate cut continue to support U.S. stocks. However, experts are increasingly concerned about the long-term political and economic consequences of undermining central bank independence.

Evercore ISI warned in a Tuesday report that asset markets are not properly priced for what increasingly seems likely to be a rupture in Fed independence.

Greg Ip, Wall Street Journal columnist, wrote:

“Don’t let that (market’s subdued reaction) fool you.t could mark the end of the Federal Reserve’s independence from White House control, which it effectively obtained in 1951. As a result, inflation is likely to be higher and more volatile than in the decades before 2020.”

Ip noted that in the 111-year history of the Fed, no president has ever attempted to remove a governor. Without a historical precedent for such politicization, investors have not yet priced in this risk — partly because the prospect of rate cuts is acting as a short-term buffer.

He compared Trump’s strategy toward the Fed to his tariff policy: a “boiling frog” approach — moving gradually enough to lull markets into thinking nothing of macroeconomic significance has happened.

The New York Times also pointed out that the market’s calm belies deeper Wall Street concerns about the gradual erosion of the central bank’s ability to make decisions free from political interference.

Eric Winograd, Chief Economist at Bernstein, said:

“It’s equivalent to the parable about the frog in water and gently heating the water up. The market is not yet as concerned as I think it should be, but if we keep going down this path at some point the frog is going to boil.”

RBC Capital Markets emphasized that markets must begin to seriously assess the implications of Trump’s actions on long-term inflation expectations, future interest rate volatility, term premium and foreign demand for U.S. assets.

The market’s calm also reflects legal uncertainty. It remains unclear whether the U.S. president has the authority to fire a sitting Fed governor. Lisa Cook is reportedly appealing the dismissal, setting the stage for a legal battle that could reach the Supreme Court.

Many experts say it’s too early to assess the full impact of Trump’s assault on the central bank. The confrontation is likely to unfold over months — and may ultimately be decided not in the markets, but in the courts.