Ready for a Trump Fed?

Recent pressure on the Fed threatens a longstanding central banking consensus. The logic behind this pressure is flawed given the role and nature of long-term rates. The risk is inflation, but portfolios may already be better protected than many think

17 October 2025

In the 1990s a consensus swept the macroeconomic and central banking world in which the latter should be able to come to decisions about interest rates independently and transparently. The Bank of England (BoE) shook off the Chancellor’s yoke in 1997, the European Central Bank (ECB) pursued monetary policy independently of member states’ governments right from its inception while the Federal Reserve (Fed), which had evolved its independence over the 20th century, became much more transparent and started publishing its meeting minutes from 1994. Imagine the dismay then when the Trump administration applied pressure this year on the Fed to aggressively cut interest rates even as headline consumer price index (CPI) inflation stood above its mandated 2.0% target (it’s currently 2.9%*). President Trump has described current Chair Powell as “far too late” in getting round to cutting rates, even going so far as to try to sack hawkish Fed governor Lisa Cook and actually installing Stephen Miran who has called for fully five rate cuts¹ this year alone. Investors are right to be wondering where all this has come from after so many years of economic and political agreement on the issue, and what the portfolio outcomes might be should the worst happen and the Fed actually comes under the direct control of the White House.

Markets, not policymakers, set long-term rates

In terms of the why, there is no shortage of potential reasons for the administration’s zeal for loose monetary policy. Most obviously, a booming economy would play well politically as the mid-terms approach, since it is one of if not the key deciding factor behind electoral success. In particular, President Trump has remarked on the headwind of elevated interest rates and in one sense he is not wrong given that the 30-year mortgage rate currently stands at over 6.30%² according to Bankrate.com. Not unrelated, there is a further perception in the administration that interest rate cuts would also provide relief on the thorny issue of the enormous budget deficit, which currently stands at over 6% of Gross Domestic Product (GDP)*. Then there are the President’s own (extensive) real estate and bond holdings which would technically stand to gain from lower interest rates. But potential conflicts of interest aside and focusing on the issue of mortgage rates and the cost of America’s debt servicing, the administration reveals a possible misunderstanding of how market-based interest rates actually work. The 30-year mortgage rate is itself a function of the 10-year US Treasury bond, with some extra yield added for credit and repayment risk, and servicing costs. A cursory look at the two over time reveals them following the same broad pattern, with the 30-year mortgage rate displaying a ‘spread’ of between 1-3% points* over the 10-year US Treasury yield over the last quarter century. Today that spread is slightly elevated at just over 2%*. But the real issue is that the yield on US Treasuries, and therefore the 30-year mortgage rate, is set by buyers and sellers rather than the Fed which only has total control over the near-term interest rate. Similarly, the interest rate cost of servicing the budget deficit is a direct reflection of the longer-term yields set by the US Treasury market. The average maturity of all US Treasury issuance – according to the US Treasury themselves – is nearly six years. While it’s true that T-Bills and 1-2 year US Treasury issuance takes its cue largely from the Fed interest rates, longer maturities are far more influenced by market forces.

Monetary policy losing its Fed anchor risks searing-hot inflation

This brings us onto what the consequences of direct political control of the Fed would be. Clearly, the administration’s unique take on how near-term interest rates influence mortgages and debt servicing costs is feeding into direct calls to cut interest rates and while this may boost the economy and markets in the short term, there is one particular stand-out risk that investors should consider – inflation. As mentioned, headline CPI in the US is already running hotter than mandated, in large part due to elevated inflation expectations amid the trade war the administration is fighting. Removing the Fed’s independence would likely destroy any hope that rates could be used to control inflation. Indeed, the academic literature argues that the very existence of an independent central bank has been shown to deter inflationary expectations. When the BoE’s independence was announced on 6 May 1997, the gilt market rapidly priced in falling inflation over the next few years. It’s probably safe to assume that the removal of that same independence from the Fed would have the reverse effect, raising inflationary expectations. And the timing couldn’t be worse, with inflation already running hot thanks to tariff uncertainty. With the presumed removal of an inflation mandate, there would be no more reassurance for market participants that any inflation would eventually be brought under control by an institution whose very purpose was to combat it. Inflation expectations would take off, and actual inflation would follow soon after, as it nearly always does when expectations rise. Similarly, the US dollar would likely depreciate further as confidence drains from the US financial system and global capital seeks out better interest rates elsewhere.

Killing it – Bank of England independence vanquished UK inflation expectations in the late 1990s:

From 31 Dec 1996 to 31 Dec 1998

Why sticking with core US exposure could help shield portfolios through any inflation bout

What then, should investors do? History provides a rich set of lessons on what assets historically perform well during bouts of inflation. Most obvious are of course real assets including commodities such as real estate and gold which can literally be seen and touched, and which have been shown to generally ride out inflation well. And a falling US dollar would surely be good for emerging market (EM) equities given the historically inverse relationship between them and the greenback. Since most trade invoicing involving emerging market economies is denominated in dollars, a weaker US currency would automatically encourage trade and economic activity. Clearly though, multi-asset investors cannot position their entire portfolios around the possibility of one particular policy change, and specific hedges can start to get expensive if the underlying risk does not materialise. The above areas of the market are worthy of allocation for other sound reasons but outsize bets in them may not make sense if the Fed manages to preserve its independence after all. For example, gold is already expensive at over USD 4,000 / oz.* while holding too much EM equities can be a source of volatility for the unaware. Do portfolios really need more of both right now? The good news is that there is one asset class which probably makes up most investors’ portfolios today but which also happens to be highly effective at coping with inflation over time, namely US equities. US corporate earnings have had an uncanny ability to ride out inflation over time, making USA Inc. effectively a price-setter. While an unexpected dismantling of the Fed’s independence could well cause a near-term price shock for US consumers, history has shown that investors would do well to stick to their core US equity exposures regardless. In that sense, they may be ready for a Trump Fed without even realising it.

Riding it – US corporate earnings have taken inflation in their stride over time:

From 31 May 1983 to 31 Aug 2025

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.