Rhythmic Reasoning_Highlights_SWM_EN - Flipbook - Page 6
SPOTLIGHT ON THE FEDERAL RESERVE’S INDEPENDENCE
President Trump takes aim at reshaping the composition of the Fed board to
align with his economic agenda
President Trump’s attacks against the Fed have caught investors’ attention. His
criticisms were initially directed at Chair Jerome Powell, but they soon expanded to
include Governor Lisa Cook, whom he has attempted to dismiss over mortgage fraud
allegations. Trump’s attempts to fire Cook have been blocked by a Federal judge and
the matter is now with the Supreme Court.
Fortuitously for Trump, Governor Adriana Kugler announced her resignation from the
Fed board effective August, 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 shares his views for quicker and
deeper rate cuts. At the September Fed decision, Miran dissented in favour of a 50bps
cut and penciled in 150bps in rate cuts by year-end—compared to 75bps by the
median.
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. 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 monetary policy views for much lower policy rates.
This scenario could lead to short 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. The politicization of the Fed could also erode the
institutional credibility of the Fed as investors question the ability of the central bank
to fulfill its dual 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.
The U.S. yield curve has steepened in recent months as the
market expects easier monetary policy settings ahead
4.9%
4.7%
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4.3%
4.1%
3.9%
3.7%
3.5%
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Current
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6 months ago
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