President Trump has expressed dissatisfaction with the pace of Fed rate cuts, adding to uncertainty about Fed leadership and policy direction.
- The US president has said that the Fed "must substantially lower interest rates now."
- While the president said that removing the Fed chief is "highly unlikely," he also said he didn't "rule out anything."
- The US president's decision to fire the Bureau of Labor Statistics (BLS) commissioner following a disappointing July labor report underlined his willingness to challenge the autonomy of traditionally independent institutions.
But the chances of a direct challenge to the Fed's autonomy are unlikely, in our view.
- A decision to fire the Fed chair would likely cause a backlash in financial markets, calling into question the long-term outlook for price stability and adding a risk premium to US Treasuries.
- Our view is that the White House would be unwilling to take this risk.
- Removing Powell before the end of his term in May 2026 would face legal challenges.
So, we do not expect the appeal of US Treasuries to be undermined by worries over Fed independence, and we continue to view quality bonds as attractive.
- With Fed decisions still being guided by economic data, rather than political pressure, we expect rates to come down by 100 basis points by June 2026, especially following the weak jobs data for July.
- This will further erode the value of cash deposits, adding to the appeal of the durable income offered by quality bonds, including US Treasuries, which we expect to retain their role as the linchpin of the global financial system.
New this week
Speaking at Jackson Hole, ECB President Christine Lagarde called central bank independence “vital” for stability, warning that undermining autonomy risks making monetary policy “dysfunctional.” While Powell did not address the issue, President Trump renewed his criticism, saying, “We call him too late for a reason,” and reiterated his threat to fire Fed Governor Lisa Cook over a separate matter.
Did you know?
- While the president has the authority to initiate removal proceedings “for cause” against a Federal Reserve governor, the legal standards and their applicability to the chair remain subject to interpretation. No Fed governor has ever been sacked “for cause.” The framework for Fed independence, established by the 1951 Treasury-Fed accord, has endured previous political challenges.
- A move to dismiss the Fed chair could raise questions about the long-term credibility of US monetary policy and the Fed's independence, which has historically been viewed as a key pillar of the financial system.
Investment view
High grade and investment grade bonds offer an attractive risk-reward proposition, in our view. We do not expect risks to the Fed's independence to change this. With rate cuts likely to resume later in the year, we believe quality fixed income offers a way to lock in attractive yields.
