Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 13
THE DRUMMER'S EAR | RHYTHMIC REASONING
Fortuitously for Trump, Governor Adriana Kugler announced her
resignation from the Fed board effective August 2025, despite
her term running through January 2026. This opened the door
for Stephen Miran’s appointment to complete the remainder of
Kugler’s term. With this move, Trump came closer to reshaping the
Fed to align with his economic agenda, appointing individuals who
share his views for quicker and deeper rate cuts. At the September
Fed decision, Miran dissented in favour of a 50 bps cut and penciled
in 150 bps in rate cuts by year-end – compared to 75bps by the
median (Fig. 2).
mandate of fostering stable prices and maximum employment.
Ultimately, this could cause investors to demand a premium for
holding longer-dated U.S. Treasuries, steepening the yield curve
even further. In recent months, we’ve seen the market price in
expectations of easier monetary policy, as reflected with the yield
curve steepening from where it was six months ago.
Fig. 3: The U.S. yield curve has steepened in recent
months as the market expects lower policy rates ahead
5.0%
Fig. 2: Miran’s 2025 policy rate forecast was an outlier
4.50%
4.38%
4.25%
4.13%
4.00%
3.88%
3.75%
3.63%
3.50%
3.38%
3.25%
3.13%
3.00%
2.88%
2.75%
2.63%
2.50%
2.38%
2.25%
2.00%
Median
2025
2026
2027
Long-run
ll
ll
ll
lllllllll
llllll
ll
l
l
l
l
ll
l
ll
llll
l
ll
lll
4.5%
l
llllll
Miran
l
ll
ll
llll
lllllll
lll
lll
ll
ll
3.4%
3.1%
3.5%
3 mths
6 mths
1-yr
2-yr
Current
l
3.6%
4.0%
3.0%
Source: U.S. Federal Reserve, Scotia Wealth Management
The tide could turn further in the President’s favour in 2026.
Powell’s term as Chair ends in May 2026, and Trump has a shortlist
of candidates for the position. The incumbent Chair faces a choice
next year to remain as a Governor to uphold the Fed’s dual
mandate against opposing voices or to step aside entirely. If Powell
opts for the latter, Trump can appoint his and Miran’s replacements
in 2026. If the Supreme Court rules in favour of removing Cook,
then that gives Trump another appointment, in addition to
Governors Waller and Bowman, both Trump appointees who have
tended to lean in favour of greater easing.
In other words, there is a scenario where five of seven board
members – who heavily influence the outcome of policy decisions
made by the broader 12 person committee – will be sympathetic
to Trump’s views for much lower policy rates. In May 2026, the
appointment/reappointment of regional Reserve Bank presidents
will also require the final approval of the Federal Reserve Board,
which may add greater voting numbers to officials that share the
President’s views on monetary policy were some of the current
regional heads to be replaced.
A POLITICIZED FED WILL LIKELY CAUSE DISRUPTION ACROSS
MARKETS…
This scenario could lead to short-term rates falling as the ‘new’
Fed’s perceived neutral rate (the rate that neither stimulates nor
restrains demand) declines. Substantially looser monetary policy
settings would in turn stoke inflation and growth expectations,
pushing long-term yields higher. Adobe Clean DC; ;;-28 The
politicization of the Fed could also erode its institutional credibility
as investors question the ability of the central bank to fulfill its dual
3-yr
5-yr
7-yr
10-yr
30-yr
6 months ago
Source: Bloomberg Finance LP, Scotia Wealth Management
Beyond Treasuries, an aggressively dovish Fed could initially buoy
equities as lower policy rates reduce discount rates and lift
valuations, particularly in rate-sensitive sectors like technology
and growth stocks. Following the initial euphoric stage, ultra-loose
monetary policy could give way to structurally higher inflation
which could raise market volatility and erode profitability.
The U.S. dollar could also be pressured. All else equal, lower interest
rates put downward pressure on the dollar as capital flows to
higher-yielding assets abroad. A politicized Fed could amplify this
impact as the loss of independence causes investors to sell U.S.
assets.
…BUT THIS SCENARIO IS NOT YET A GUARANTEED OUTCOME.
Of course, a lot of dominoes will need to fall for this scenario
to materialize and there are still several unknowns around how
much sway Trump could gain over the Fed. Governor Cook’s fate
is still unknown, and Powell could choose to remain as a Governor
after his term as Chair expires in 2026. These factors alone will
determine whether Trump can appoint one or several Governors.
Even if the President were to tilt the balance of the board with his
appointees, it is important to remember that monetary policy is
set by the full 12-member Federal Open Market Committee, and it
is not clear whether they would all align with a particular political
agenda. In other words, the risk of Fed politicization has increased,
and that alone has caused the curve to steepen, but it is not yet
a guaranteed outcome that political motivations will determine
monetary policy.
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