President Donald Trump’s attempt to fire Fed governor Lisa Cook has raised the risk of more politicized Federal Reserve over the next six to 12 months, UBS warned in a recent note, threatening further downside in the dollar and upside for gold.
“While political pressure may weigh on longer-dated U.S. government bonds, we continue to see value in high grade and investment grade bonds, especially those with medium-duration maturities,” the UBS economists said in a recent note. The U.S. dollar, which is already under pressure from expected Fed easing and rising fiscal challenges, “could take another hit if Fed independence or credibility is eroded,” while gold is likely to benefit amid ongoing uncertainty and lower real interest rates.
Trump’s move to dismiss Cook, citing allegations of mortgage fraud, has so far prompted a muted market reaction with respect to Fed independence concerns.
If Trump succeeds in his removal of Cook - a voting member of the 12-member Federal Reserve Open Market Committee (FOMC), which sets interest rates, he would be able to nominate a new member to the seven-seat board, which is increasingly leaning toward a more dovish, rate-reducing bias.
This dovish tilt was underlined by Fed chairman Jerome Powell during a recent speech at Jackson Hole, Wyoming.
"With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," Powell said in remarks at Jackson Hole. Deep rate cuts, however, aren’t likely, UBS said. "Unless the labor market deteriorates sharply, there may be some limits to how far policy could shift."
The politicizing of the Fed, meanwhile, may have far-reaching consequences for Trump’s plan to reshape the central bank with potential unorthodox nominees that are more aligned with his political agenda.
"We also note that any successor(s) nominated to the Fed must be confirmed by the Senate; political attacks on the Fed’s independence might endanger the passage of less orthodox candidates," the economists added.
As political interference looms as a key risk, investors face a delicate balance between Fed mandates and potential compromises to its independence that will likely drive demand for safe-haven gold. Gold is likely to benefit from "ongoing uncertainty and lower real rates,” UBS said, setting a target of $3,700 per ounce by the middle of next year.
