Power struggle over the US Federal Reserve: Politicization of the Fed endangers the dollar and supports gold

Trump's motives are transparent: He wants to use lower interest rates to reduce debt service costs and stimulate economic growth, as the US economy has lost momentum . This is partly due to the president's own trade policy, which burdens companies with higher tariffs. But it is also due to higher interest rates compared to other countries. While domestic demand in the US grew by around 3 percent per quarter in 2024, it only increased by 1.1 percent in the past quarter. Consumer growth has effectively come to a standstill. The labor market is also weakening. The number of newly created jobs has fallen significantly, and unemployment has reached a new cyclical high.

Based on these economic figures alone, the Fed is expected to resume interest rate cuts at its September meeting . Federal Reserve Chairman Jerome Powell (72), who has been repeatedly heavily criticized by Trump, already paved the way for this step in his speech last Friday. At the same time, inflation and price pressure are currently very pronounced due to the tariff increases. Core inflation rose again to more than 3 percent in July. Producer prices have also recently risen sharply, which indicates that price pressure will remain high, at least for the time being. In addition, while growth is likely to remain subdued in the coming months, it could pick up again with a view to 2026. The fiscal package passed in July will have positive growth effects, while at the same time the negative effects of trade policy should gradually subside. Growth may therefore exceed trend levels over the course of the year.

From a macroeconomic perspective, therefore, sharp interest rate cuts are currently unnecessary. It would make economic sense to adjust the restrictive monetary policy toward neutrality: three interest rate cuts of 25 basis points each would be appropriate.

Due to the politicization of monetary policy by US President Trump, the Fed is likely to cut interest rates more sharply. With his attacks on Fed Chair Powell and the dismissal of Cook – for allegedly making false statements in a mortgage lending – he is further increasing the pressure on the central bank. He is creating the opportunity to appoint another loyal representative to the Federal Open Market Committee, which is responsible for interest rate policy, and to establish a 4:3 majority on the board – assuming Cook's dismissal stands. If he succeeds in appointing a candidate to the central bank's executive committee who advocates for deeper interest rate cuts, this would give politicians even greater influence over the monetary policy committee than they already have.

Incidentally, Treasury Secretary Scott Bessent (63) is responsible for the search for a new chairman of the Federal Open Market Committee. He has already made it clear to the Fed that he expects interest rate cuts of at least 150 basis points. Committee members who do not vote for a cut of at least 50 basis points at the next meeting would likely significantly reduce their chances of becoming chairman.

It is therefore highly likely that the Fed's politicization will lead to interest rate cuts that exceed the macroeconomic realities. While this will support real growth, it will also make the Federal Reserve's 2 percent inflation target unsustainable.

For the financial markets, this means that short-term bond yields are likely to fall – which, however, will be accompanied by upward pressure on inflation expectations and maturity risk premiums. As a result, yields on longer-term bonds are unlikely to fall despite lower short-term interest rates. The trend in yields on two-year and 30-year US Treasury bonds is already showing increasing divergence. The yield curve is steepening. For the strategic outlook for the bond market, this means a neutral stance at the short end, with a focus on securities that benefit from interest rate advantages, such as corporate bonds or government bonds in the periphery of the Eurozone. At the same time, the outlook for the long and especially very long part of the curve remains focused on sideways to rising yields. Inflation-linked bonds are relatively attractive and can be overweighted.

The same applies to equities. Overly loose monetary policy in the US will increase real growth and, consequently, inflation. This will lead to stronger nominal growth and cash flows in the economy. This will support – at least temporarily – corporate earnings growth and dampen debt dynamics. At the same time, monetary easing will lead to higher price-earnings ratios for equities.

For the US dollar, however, an ultra-loose monetary policy would be a burden. Due to a generally positive environment for risk assets, international investors are less likely to sell their holdings of US equities and instead increase their hedge ratios on the resulting US dollar exposure. Accordingly, downside risks to the US dollar currently outweigh the downside, making periods of strength suitable for selling, including against the euro. Real money investors should allocate to US dollars more closely to the US share of global GDP (approximately 30 percent) than to the US equity market's share in the MSCI World Index (approximately 70 percent).

Alternatives to the US dollar, especially gold and silver, are likely to benefit from this development. Immediately after Cook's dismissal, the price of gold surged sharply. In the long term, geopolitical developments and the US debt dynamic, which threatens to undermine confidence in the US dollar as the reserve currency, also favor the precious metal. Therefore, major price setbacks provide opportunities to buy more.

The same applies to cryptocurrencies such as Bitcoin and Ether. They benefit not only from excessive monetary easing but also from more friendly regulation in the US. However, the risks and volatility of all cryptocurrencies remain very high. Despite the rapid developments of the past few months, there is still no evidence that they offer long-term value stability.

Daniel Pfändler has extensive experience in macroeconomic analysis and financial market strategy. He is the founder of the independent research firm Research Ahead and a member of the opinion-forming panel at manager-magazin.de. Nevertheless, this column does not necessarily reflect the opinion of the manager magazin editorial team.