President Trump has expressed dissatisfaction with the pace of Fed rate cuts, adding to uncertainty around Fed leadership and policy direction.
- The US president last week wrote that the Fed "must substantially lower interest rates now," dubbing the Fed Chair "Jerome 'Too Late' Powell."
- While the president said that removing the Fed chief is "highly unlikely," he also said he didn't "rule out anything."
- The President's decision to fire the Bureau of Labor Statistics (BLS) commissioner following a disappointing July labor report underlined Trump's 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 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.
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Federal Reserve Governor Adriana Kugler announced her resignation, effective 8 August, several months ahead of schedule. The early exit of Governor Kugler creates an opportunity to shape the 12-member rate-setting Federal Open Market Committee. Since Kugler is a dovish voice on the committee, the potential of the appointment to affect policy in the coming months is limited. However, investors will be looking for clues on the longer-term outlook from the nature of the appointment, including how policy-driven it appears, or how experienced the candidate is.
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 attractive risk-reward proposition, in our view. We do not expect risks to the Fed's independence to change this. With rate cuts set to resume later in the year, quality fixed income offers a way to lock in attractive yields.
