SUMMARY
Investors have held firm amid uncertainty over U.S. central bank independence. Further such geopolitical events could follow this quarter, and we reiterate our positive view on gold.
KEY TAKEAWAYS:
The U.S. central bank’s independence is under political pressure
The Fed is standing firm and market reaction has been subdued
With the U.S. economy strong, investors expect fewer Fed rate cuts this year
To hedge ongoing uncertainty, we prefer gold over long duration fixed income
The independence of the Federal Reserve is under intense scrutiny once again following a statement from Fed Chair Powell disclosing the Department of Justice issued subpoenas regarding his testimony on Federal Reserve building renovations.
Powell directly connected these legal actions to an effort to influence monetary policy, though President Trump denied prior knowledge of the subpoenas and any intent to enact that influence.
Initial market reactions were modest, though predictable: equity prices fell, the dollar depreciated, and longer-term Treasury yields and gold prices rose from another bout of U.S. policy uncertainty.
This aligns with our portfolio’s strategic underweight on duration and favored gold exposure as a hedge to geopolitical events.
It is widely understood that shielding central banks from political pressure enhances monetary policy credibility and fosters more optimal economic and inflation outcomes.
While political pressure on monetary policy is not new, the public nature of these events and the Fed Chair’s forceful response is unprecedented.
We agree with the market’s subdued reaction as the Fed has recently and unequivocally asserted its autonomy.
First, while Chair Powell affirmed his commitment to his role with integrity, the unanimous vote of the Fed’s Board of Governors to reappoint regional Fed presidents, some of whom favored less accommodative monetary policy, also demonstrated a unified front.
Second, the Supreme Court has previously avowed the Fed’s distinct independent agency status and offered protection via precedent, particularly concerning presidential removal powers, as seen in its stance on Governor Lisa Cook.
Third, legislative checks are actively engaged. Senator Thom Tillis, a Republican on the Senate Banking Committee, vowed to block any Fed nominees until these legal issues are resolved, highlighting concerns about the Department of Justice’s impartiality.
These combined defenses illustrate a resilient framework designed to preserve central bank autonomy.
Regardless, and as we discussed in our Q1 “The Short and Long”, geopolitical events like this present temporary opportunities via market volatility that quickly fade in effect.
We will likely see more policy, geopolitical, and fundamental events this quarter driving similar investor angst.
However, we suggest staying anchored in fundamentals as these do not undermine conviction in our core positions.
The interest rate market seems to agree as it prices in fewer rate cuts this year, focused more on the resilient economy than the ongoing political pressure – in line with our view entering 2026.
Bottom Line: The market’s subdued but predictable reaction to new headlines around the Fed’s independence will quickly fade as most geopolitical events do – though this will not be the last event this quarter.
Around these volatility bouts, we want to stay anchored in our core convictions, which currently include preferring gold over duration as a hedge to uncertainty.
