Macro & Strategy - October 2025

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Under Pressure

“Pressure pushing down on me…” — Queen & Bowie

The Federal Reserve, arguably the most important economic institution in the world, is under pressure. But not the kind that comes from inflation data or labour market volatility. This pressure is political, and it’s blatant.

The Trump administration has made no secret of its intentions. As we discussed in last month’s piece, the White House has made it clear: It wants a more “responsive” Fed. In other words, lower rates, looser policy, and a governing council aligned with its electoral priorities. The pressure on Chair Jerome Powell has been incessant, and the administration is actively working to reshape the Federal Open Market Committee (FOMC) by influencing nominations for both the Board of Governors and the 12 Regional Presidents, whose terms all expire in February 2026.

This pressure campaign isn’t subtle. It’s a direct challenge to the Fed’s independence. And it raises a fundamental question: What is central bank independence really worth?

Section 1: Under pressure – The Fed’s independence isn’t just a principle. It’s a pillar.

Credibility: The currency behind the currency

Let’s start with credibility. In a fiat system, where money isn’t backed by gold or any other physical asset, the value of a currency rests on trust. That trust is built on the belief that the central bank will maintain price stability, not just today, but over time.

A credible central bank anchors inflation expectations. It allows businesses to plan, workers to negotiate wages, and investors to allocate capital with confidence. It also makes monetary policy more effective. When the Fed raised rates in the 1980s under Paul Volcker, it had to go well above inflation to reassert control. But in 2021–2022, the Fed and other credible central banks raised rates more modestly, and inflation still came down. Why? Because markets believed they would act decisively, if needed. That belief did part of the work.

Credibility, in short, is a force multiplier. It reduces the cost of fighting inflation and increases the effectiveness of every policy tool.

Highlights

• Political pressure on the Federal Reserve is intensifying, threatening its independence and signaling a major regime shift in U.S. monetary policy.
• A politicized Fed is likely to cut rates for electoral reasons, fueling asset bubbles and driving risk assets higher despite rising inflation.
• We remain overweight equities and gold, with new positions in emerging markets and an underweight stance on the U.S. dollar, reflecting the evolving macro and policy landscape.

Independence: The long game

Independence is what allows central banks to play the long game. It’s the institutional firewall that protects monetary policy from the short-termism of electoral cycles.

Politicians operate on four-year timelines. They want growth, jobs, and low interest rates—especially in election years. But monetary policy works on a different clock. It needs to anticipate inflationary pressures, manage expectations, and sometimes make unpopular decisions to preserve longterm stability. History offers plenty of cautionary tales, in the United States and elsewhere, of the consequences of political interference in the setting of monetary policy.

Independence isn’t about ignoring politics. It’s about insulating monetary policy from its worst impulses.

What independence looks like

So, what does independence actually mean?

Legally, the Fed is structured to resist political interference. Governors serve 14-year terms, staggered to avoid wholesale turnover. Regional Presidents are nominated by local boards, not Washington. The Fed answers to Congress, not the White House, and its dual mandate of price stability and maximum employment is enshrined in law.

Of course, no central bank is entirely apolitical. Presidents nominate governors, and philosophical alignment is inevitable, with Keynesians, monetarists, and supply-siders all leaving their mark. But that’s not the same as political control. The Fed’s mandate is separate from the Treasury’s goals. Its decisions are based on data, not campaign calendars.

And that separation matters. It’s what allows the Fed to raise rates when inflation is rising, even if rate hikes are unpopular. It’s what prevents governments from inflating away debt. And it’s what gives investors confidence that the rules of the game won’t change overnight.

The Orwellian argument: “It was never independent”

Some critics argue that the Fed has never been truly independent, that its structure, its appointments, and its accountability to elected officials make independence a myth. But this argument misses the point.

Yes, the Fed is a public institution. Yes, its governors are nominated by presidents.

But independence isn’t about isolation; it’s about insulation. It’s about having the legal and institutional framework to resist short-term political pressure and pursue long-term economic stability.

The Treasury-Fed Accord of 1951 was a turning point. It ended the Fed’s obligation to finance government debt at fixed rates and allowed it to set interest rates independently. The Federal Reserve Reform Act of 1977 clarified its mandate and increased transparency. The adoption of a 2% inflation target in the 1990s further anchored expectations and reinforced the Fed’s credibility. These changes weren’t cosmetic. They were structural reforms that gave the Fed the tools, and the legitimacy, to act independently.

Why this matters now

Today, those tools are being tested. The Fed’s credibility has eroded amid the worse inflation episode the United States has seen in decades. It opened the door for heightened criticism of the institution, increasing its vulnerability to political pressure. The Trump administration’s efforts to dismiss Governor Lisa Cook, reshape the Board of Governors, and influence Regional President nominations are unprecedented. If successful, they could tilt the FOMC toward a more dovish, politically responsive stance—one that prioritizes short-term growth over long-term stability.

Markets are watching. Investors understand that a politicized Fed could cut rates for electoral reasons, fuelling asset bubbles and mispricing risk. They also know that once credibility is lost, it’s hard to regain. Just ask Argentina. Or Turkey. Or the United States in the 1970s.

The Fed is under pressure. But it’s been here before. And if history is any guide, the stakes are too high to yield.

Section 2: When the music stops – What happens when central banks lose their independence

Central bank independence is one of those things you don’t think about until it’s gone. And when it disappears, the consequences are swift, severe, and often irreversible.

In this section, we revisit a few historical and recent episodes, some close to home, others from abroad, where central bank interference, whether blatant or subtle, led to macroeconomic disarray, inflationary spirals, and market dysfunction. These examples remind us that independence isn’t a technocratic ideal. It’s a foundational pillar of economic stability.

United States, 1960s–1970s: The Great Inflation

In the 1960s, President Lyndon B. Johnson pressured Fed Chair William McChesney Martin to keep interest rates low to finance the Vietnam War and his ambitious Great Society programs. Martin, famously summoned to Johnson’s Texas ranch for a stern lecture, later admitted he delayed rate hikes “to his great shame.”

Then came Richard Nixon. Obsessed with re-election in 1972, Nixon leaned heavily on Fed Chair Arthur Burns to stimulate the economy. Burns complied. The Fed loosened policy, the money supply surged, and the economy boomed—just in time for the vote.

But the hangover was brutal. Inflation, which had hovered around 3% in the early 1970s, soared to over 12% by 1974. The dollar depreciated sharply after the collapse of Bretton Woods. Long-term Treasury yields spiked. The Dow Jones lost nearly half its value in two years. The U.S. economy entered a period of stagflation—high inflation, high unemployment, and low growth.

It took Paul Volcker’s shock therapy in the 1980s—raising rates to nearly 20% and triggering two recessions—to restore credibility. The cost of regaining independence was immense. But the cost of losing it had been even greater.

Argentina, 2000s–2020s: The perpetual crisis

Argentina offers a cautionary tale of what happens when central bank independence is never truly established. Throughout the 2000s and 2010s, successive governments used the central bank to finance deficits, manipulate exchange rates, and suppress inflation statistics. Governors were dismissed for resisting political pressure. The peso was printed to fund populist spending.

The consequences were predictable—and devastating.

Les conséquences étaient prévisibles... et elles ont été dévastatrices.

Inflation became chronic, reaching 211% in 2023. The peso collapsed. The middle class was decimated. Investors demanded sky-high risk premiums or avoided the country altogether. Sovereign bonds traded at distressed levels. And the central bank, viewed as a political tool, lost all credibility. In late 2023, newly elected President Javier Milei proposed dollarizing the economy and abolishing the central bank altogether—a radical move, but one that reflected the depth of institutional failure. Argentina’s experience shows that, without independence, a central bank becomes a printing press. And once that perception takes hold, it’s nearly impossible to reverse.

Turkey, 2018–2023: The doctrine of denial

Now onto the other poster child of political interference, Turkey.

President Recep Tayyip Erdoğan declared war on interest rates in 2018, calling them “the mother and father of all evil.” He dismissed central bank governors who dared to raise rates and installed loyalists who followed his unorthodox view that high rates cause inflation. The result? A textbook case of monetary dysfunction.

Inflation surged past 85% in 2022. Over a decade, the Turkish lira collapsed, losing more than 95% of its value against the U.S. dollar. Investors fled. The bond market demanded double-digit yields to compensate for risk. The economy dollarized as citizens abandoned the lira. And although the stock market rose nominally, real returns were wiped out by inflation.

Eventually, Erdoğan was forced to reverse course. In 2023, he appointed a new economic team and allowed the central bank to raise rates again. But the damage had been done. Credibility had evaporated. And rebuilding it will take years, if not decades.

The common thread: Credibility lost, pain multiplied

These examples may represent worst-case scenarios, but they highlight an unmistakable pattern: Political interference leads to short-term stimulus, which leads to inflation, currency depreciation, and heightened volatility. Restoring credibility afterward requires painful tightening. This pattern has been observed time and time again. Studies of several episodes of political pressure on central banks demonstrate a clear association with higher inflation¹. Even when central banks resist pressure to ease policy, the result is still higher inflation over time. Why? Because political interference erodes credibility, and inflation expectations rise.

Today, the United States is once again testing the limits of central bank independence with unexpected vigor. The lessons of history are clear: There will be a price to pay.

Section 3: Thinking backward – The Fed’s independence is fading, and the market regime is shifting

Our highest-conviction call is that the Trump administration will do everything in its power to gain influence, if not outright control, over the Federal Reserve. The question is no longer if it will try, but how much control it is likely to get, and how fast.

This isn’t speculation. It’s a strategic assessment based on observable actions, legal vulnerabilities, and political intent. Investors should prepare for an important regime shift in U.S. monetary policy—one that could reshape the macro landscape and market dynamics for years to come.

The four scenarios

We define four plausible end states for the Fed’s independence:

1. Full independence preserved: Institutional and legal safeguards prevent political interference.
2. Independence compromised partially: Political influence begins to shape select decisions, particularly rate policy.
3. Functional independence lost: A politically aligned majority of the Board members and of the Regional Presidents leads to decisions driven by electoral cycles.
4. Structural reform enacted: Legal changes redefine the Fed’s governance, increasing executive control.

The evidence

Although personnel changes may grab headlines, the administration’s ambitions go beyond reshuffling the chairs at the FOMC table. What’s unfolding is a broader institutional reform agenda, one that seeks to recalibrate the architecture of monetary and regulatory governance in the United States. And, if successful, it could leave a lasting imprint on the Fed’s independence, credibility, and policy orientation.

The first salvo came in February 2025, when a sweeping executive order introduced White House liaisons into a range of independent agencies, including the Federal Reserve’s bank supervision apparatus. Ostensibly framed as a move to improve co-ordination and accountability, the initiative effectively inserts a layer of executive oversight into what has traditionally been a technocratic and insulated domain.

Next, Trump attacked Governor Cook and then appointed Stephen Miran to the Board of Governors (while keeping his employment link at the White House). Miran is already doing what Trump expects of him, dissenting at his first decision meeting in September by pushing for a 50-basis-point cut and pencilling into the dot plot his view that the overnight rate should fall to 3% by year-end.

All this, of course, against a backdrop of incessant attacks on Chair Jerome “Too Late” Powell. But what comes next could be the deadliest attack. Among the many levers of monetary policy, few are as quietly consequential, and politically sensitive, as the reappointment process for the Presidents of the regional Federal Reserve Banks.

Here’s how it works: In February of every year ending with a 1 or a 6, the Class B and C Directors of each regional Reserve Bank, who represent the public and are appointed with an eye toward diversity of perspective, are tasked with evaluating and voting on whether to renew their President’s mandate. Their evaluations are then reviewed by the Board of Governors in Washington, which holds the final say. In theory, this two-tiered process is designed to balance regional insight with national oversight. In practice, however, it can become a channel for political influence, especially when the Board is closely aligned with the sitting administration.

Assessment: Where are we headed?

To analyze the seriousness of all these developments, we apply the “thinking backward” method—a structured approach that begins with plausible outcomes and works backward to test them against diagnostic evidence. This framework is particularly useful in politically charged environments, where cognitive biases and selective interpretation of data can distort judgment.

Testing the hypotheses against this evidence leads to the following conclusions:

• Hypothesis 1 (full independence) is increasingly inconsistent with observed actions. The attempt to remove a sitting governor and the strategic timing of reappointments suggest a clear intent to influence the institution.
• Hypothesis 2 (partial loss of independence) is already materializing. Even if legal challenges block some moves, the pressure and appointments may begin to shape rate decisions.
• Hypothesis 3 (loss of functional independence) is plausible and increasingly likely. A politically aligned majority of the Board members and of the Regional Presidents could result in rate decisions that reflect electoral priorities rather than macroeconomic fundamentals.
• Hypothesis 4 (structural reform) remains a longer-term risk, but the presence of legislative proposals signals that it cannot be dismissed outright.

Strategic implications: A new market regime

This isn’t just a governance issue. It’s a potential macro regime shift.

A politicized Fed is likely to cut rates for electoral reasons, even if inflation remains above target. This easing could lead to an overheating of the U.S. economy, with faster growth, rising inflation, and artificially low interest rates. The yield curve may steepen as long-term inflation expectations rise. Risk assets, particularly U.S. equities, could rally on cheap money and momentum.

But such a rally would be built on fragile foundations.

Asset bubbles could form across multiple classes: equities, real estate, and credit. And although bubbles can last longer than we think, they rarely end well. Eventually, inflation will take its toll. The Fed might reassert its independence but will have to work hard to restore its credibility. Another soft landing would be increasingly unlikely.

In the near term, this environment is negative for the U.S. dollar. An independent central bank is indeed a key pillar of its role as the global reserve currency. Hard assets such as gold should continue to benefit. Over the longer term, the main risk is not just a cyclical misstep, but a structural shift in how monetary policy is conducted— and how markets interpret it.

Positioning

We remain overweight equities, which are supported by a macro backdrop that continues to favour risk assets. The Fed is preparing to cut rates in an economy that’s gaining momentum—even as the labour market cools. Historically, this mix has been a sweet spot for equities, especially when growth expectations are being revised upward. Cyclicals are leading, flows are constructive, and the broader narrative of reflation and policy accommodation remains intact. Within this context, we’ve initiated a position in emerging markets. EM equities, particularly in tech-heavy regions, are benefitting from Fed easing, a weaker U.S. dollar, and strong foreign inflows. Valuations are compelling, and the push for regional diversification adds further upside, despite geopolitical risks.

On the fixed income side, we’ve shifted to a broadly neutral stance globally, with a tilt toward U.S. bonds. Yields in the U.S. remain meaningfully higher than in Europe or Japan, offering a better riskreward profile. We remain underweight European bonds, because fiscal stimulus (notably in Germany) could drive ECB divergence. In Japan, the BoJ is still behind the curve, with policy rates well below neutral despite rising wages and inflation, limiting the upside for JGBs.

In currencies, we’ve moved to an underweight position in the U.S. dollar. The greenback faces structural headwinds: Fed easing, political pressure on central bank independence, and a persistent current account deficit. Meanwhile, we are maintaining overweight positions in the Japanese yen and Scandinavian currencies. The yen remains undervalued and could strengthen as the BoJ faces mounting pressure to normalize. The Norwegian krone and Swedish krona are supported by strong macro fundamentals, fiscal tailwinds, and attractive valuations.

Finally, gold remains a strategic overweight. The Fed’s easing cycle, inflation risks, and dollar weakness have created a favourable setup. Central bank demand is robust, and gold continues to shine as both a reserve asset and an inflation hedge.