Robert Farago, head of strategic asset allocation, Hargreaves Lansdown: “Fed Chair Jerome Powell gave his farewell speech to the Jackson Hole Symposium on Friday. This annual gathering of the world's central bankers, government officials, academics and financial bigwigs has the potential to move markets. Instead, it was soon overshadowed, when President Trump announced overnight that he would remove governor Lisa Cook from office due to allegedly falsifying documents in a mortgage application. Her lawyers have disputed the President’s ability to do this.
In his conference speech, Powell chose not to look back at his record since 2018, when Trump appointed him. That’s what Greenspan, Bernanke and Yellen did before him – and they weren’t being called ‘too late’, a numbskull’, or a ‘moron’ by their President. It’s true that he presided over the biggest spike in inflation since the 1970s but the cause was as much fiscal as monetary policy – and the world did avoid a COVID-triggered depression.
Investors might have hoped that he had pushed back against the growing pressure on the independence of the Federal Reserve. In the Nixon administration, the President interacted with Fed officials 160 times, compared to just six interactions during the Clinton administration. This arguably influenced monetary policy in 1971, when the then-Fed Chair Arthur Burns oversaw a cut in rates that provided support for Nixon’s reelection. And helped set the scene for the worst inflation episode in the country’s history.
In 2025, rising political pressure for lower Fed funds rates have coincided with a falling dollar and rising bond yields at the 30-year mark, where investors are most sensitive to long-term inflationary threats.
The dollar
2025 has been a torrid year for the world’s reserve currency. Looking at whether this marks the end of an uptrend that started in 2011: in the short term, Powell signaled that the balance of risks has shifted, justifying an easing of policy. Rates in the US will remain higher than those in the euro area and Japan, home to the second and third most important currencies. But the difference is expected to narrow over the next twelve months.
If Trump is successful in ousting Cook, he will have selected four of the seven board members. They will be in charge of renewing – or not – the presidents of the 12 regional Feds in February. Historically, politicians have not overtly influenced this process. If this time is different, investors’ confidence in the credibility of central bank independence will erode further, putting downward pressure on the greenback.
Longer term, the US currency looks expensive against its peers. It has swung between undervalued and overvalued in three long cycles since President Nixon decoupled the dollar from the gold standard in 1971. Rate differentials have been a key driver of this performance, but we also monitor two other factors.
Investor flow matter. The IPO of Netscape in 1995 kicked off a wave of enthusiasm for technology, media and telecom stocks. Investments flowed into the US stock market, boosting the dollar. In 2000, the bubble burst and flows went into reverse – as did the currency. Today, enthusiasm for the US market has once again been led by technology stocks – this time backed by strong earnings growth. But sky-high valuations leave little room for disappointment.
Geopolitics can also mark turning points. In September 1985, finance ministers from the US, France, West Germany, Japan and the United Kingdom met in the Plaza Hotel in New York to sign an agreement to weaken the US dollar, the Plaza Accord. This triggered a prolonged decline in the greenback. Today, global politics feels a lot less managed. But the withdrawal of US military support for its historical allies has led to a coordinated boost in fiscal spending to fill the gap. If this delivers more dynamic economies in Europe and Japan, this could be the catalyst for a turn in the dollar cycle.”
|
