Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 12
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
S P OT L I G H T: F E D E R A L R E S E RV E I N D E P E N D E N C E
Walid Khalid
Juan Manuel Herrera Betancourt
Director, Investment Strategy
Senior Economist, Investment Strategy
KEY CONCLUSIONS
•
The Federal Reserve’s (Fed) independence helps to anchor
inflation and foster maximum employment. However, this
independence is now being tested.
Politicization may already be taking place as Trump’s
appointee, Stephen Miran, significantly deviated from the
FOMC’s consensus in his policy rate forecasts.
A politicized Fed could steepen the yield curve as investors
expect lower rates, higher inflation, and demand a premium
for holding U.S. Treasurys.
In 2026, President Trump may have the opportunity to
appoint multiple people to the Fed, though this is not yet
assured.
•
•
•
FED INDEPENDENCE IS KEY TO MAINTAINING
INSTITUTIONAL CREDIBILITY IN THE U.S.
THE
The U.S. Federal Reserve (Fed) was established in 1913 to stabilize
the American banking system and protect it from bank runs and
bank failures that were a common occurrence in the 19th century.
During its infancy and for decades after its founding, the Fed’s
policies were tethered to government priorities. For instance, in
World War II the central bank was required to keep interest rates
artificially low to help finance government debt. The result was
surging inflation and a lack of confidence in the central bank’s
ability to stabilize the economy (Fig. 1).
Fig. 1: Inflation surged in the World War II era
before the Fed had established its independence
30%
20%
The seven Governors are appointed by the President of the United
States and confirmed by the Senate to serve staggered 14-year
terms. The purpose of staggering the terms, with one term expiring
every two years, is to prevent one President from filling the whole
board quickly during their term in the White House. The seven
Governors also include a Chair and a Vice Chair who serve 4-year
renewable terms.
Of the five regional bank Presidents, the New York Fed President
holds a permanent vote, while the other four seats rotate annually
from a set of eleven regional bank heads. This means that
the seven-person board and the New York Fed President have
significant sway over the long-run direction of monetary policy.
For investors, the Fed’s independence is a key tenet that gives
it credibility. Investors require confidence that monetary policy
will be guided by long-term economic goals rather than shortterm political motives. If, for instance, investors believe that
monetary policy is being manipulated ahead of an election, they
will demand higher compensation for holding U.S. assets, thereby
raising borrowing costs. By being truly independent, policymakers
can make choices that align with fulfilling their dual mandate of
fostering maximum employment and stable prices, even if those
choices may be unpopular (i.e., such as raising interest rates to
rein in inflation). Ultimately, the Fed’s independence and credibility
anchors inflation and economic growth expectations.
TRUMP MAY BE ABLE TO APPOINT MULTIPLE PEOPLE TO THE
FED IN 2026 IF EVENTS UNFOLD IN HIS FAVOUR
10%
0%
-10%
-20%
1914
The 1951 Treasury-Fed Accord marked a shift in the Fed’s role, as
it allowed policymakers to independently set monetary policy, free
from political directives. This structure holds true today with 12
voting members – seven Board Governors and five regional Reserve
Bank Presidents – who set monetary policy.
1936
1958
1980
2002
U.S. CPI YoY chg
Source: Bloomberg Finance LP, Scotia Wealth Management
2024
This independence is now being tested, with President Trump
challenging the Fed’s credibility through public criticisms of its
decisions by seeking to reshape its leadership. What began as
pointed attacks at Chair Jerome Powell has broadened into efforts
to influence the composition of the Fed’s board with Trump
attempting to dismiss Governor Lisa Cook over mortgage fraud
allegations. These attempts have been blocked by a Federal judge
and the matter is now with the Supreme Court.
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