by Brad Houle, CFA
Principal
Head of Fixed Income
Portfolio Management
The Federal Reserve’s independence is a cornerstone of U.S. financial stability. It underpins confidence in Treasury markets, the world’s deepest and most liquid, and supports the U.S. dollar’s role as the global reserve currency. Recent actions and statements from the White House, however, have stirred a debate over that independence and prompted a reasonable investor question: Will markets react to politics, or will they continue to focus on the data?
In recent months, President Trump has publicly argued that interest rates are too high and has repeatedly threatened to dismiss Fed Chair Jerome Powell, criticizing him for “waiting too long” to lower rates. The administration has also attempted to remove Federal Reserve Governor Lisa Cook, citing alleged mortgage fraud—an unusual step, as no U.S. president has previously tried to oust a sitting governor of the Fed so publicly. These actions have raised concerns usually associated with developing economies rather than the United States.
Markets wobbled in the immediate aftermath of “Liberation Day” on April 2, when equities, the dollar and Treasuries sold off together, marking the beginning of what became known as the “Sell America” trade. Since then, however, the tone has steadied. Before the April 2 announcement, the yield on the 10-year Treasury bond was at 4.20%, peaking at 4.60% in May and now standing at 4.2% as of today. The bond market, in particular, appears to be looking past the political noise and trading on fundamentals, such as employment, inflation and GDP growth. That doesn’t mean headlines are irrelevant, but it does suggest that fixed-income investors still view the Fed—and Chair Powell specifically—as credible stewards of monetary policy.
The institutional guardrails also matter. Any replacement for a Fed governor must first clear the Senate Banking Committee and then win confirmation from the full Senate. That process, by design, slows abrupt changes in the composition of the Board and helps preserve continuity of policy. While the political temperature may run hot, the machinery of appointments remains deliberately methodical.
Chair Powell’s recent remarks at Jackson Hole were interpreted as dovish and consistent with a data-dependent outlook. Markets currently expect two rate cuts this year for straightforward economic reasons: inflation is broadly under control and the labor market is showing the kind of gradual softening typical of late in the economic cycle. If incoming data continues along this path, a gentle easing makes sense; if not, expectations will shift accordingly. In other words, the center of gravity for rates still resides with the numbers, not news headlines.
For fixed-income investors, the message is both simple and reassuring. The Fed’s independence continues to anchor expectations, which in turn supports the credibility of U.S. sovereign debt as the global benchmark for risk-free assets. Powell’s term as Chair runs through May 2026, and his term as a member of the Board of Governors extends to January 2028. There will almost certainly be more drama between now and then—personnel stories, confirmation battles and sharp soundbites—but, for now, the bond market is taking its cues from inflation, employment and growth rather than from politics.
Takeaways for the Week:
The Fed and Chair Powell are still viewed as having integrity by the bond market
We’ll continue to monitor the appointment process, the evolution of the data and any indications that markets are pricing policy through a political rather than an economic lens
For the moment, fundamentals remain in the driver’s seat