The Federal Reserve’s expected interest-rate cut will increase risks for stocks, bonds, and the dollar if it’s perceived to be driven by political pressure.
That’s according to a Sept. 15 note from David Kelly, chief global strategist at J.P. Morgan Asset Management.
The Trump administration’s unprecedented attempt to control the Fed Board of Governors is causing grave concerns about the future independence of the U.S. central bank among economists and traders at home and abroad.
- Stephen Miran won Senate approval Sept. 15 to join the Fed Board of Governors in time for the Federal Open Market Committee which meets Sept. 16-17.
- Fed Governor Lisa Cook gets to keep her job for now, after an appeals court ruled Sept. 15 that President Donald Trump couldn’t fire her.
The Trump administration’s unprecedented attempt to control the Federal Reserve is worrying economists and traders.
Image source: Chip Somodevilla/Getty Images
Federal Reserve oversees inflation, jobs, and interest rates
The Federal Reserve’s dual mandate from Congress requires price stability and low unemployment.
When the Federal Open Market Committee (FOMC) votes Sept. 17, many traders and economists expect it will cut the benchmark Federal Funds Rate to shore up the nation’s crumbling labor market and lower the cost of short-term borrowing.
But some experts say the inflation side of the mandate can’t be discounted.
- Lower interest rates lead to less unemployment but higher prices.
- Higher interest rates lead to lower inflation but higher employment.
The FOMC is widely expected to cut the current funds rate of 4.25% to 4.25% for the first time this year.
It has held off to monitor the path of tariff inflation through the nation’s supply chain and to determine if those price increases would be a one-time bump or have lingering effects on consumers’ wallets.
Related: Mounting concerns rattle Federal Reserve watchers
The widely watched CME Group FedWatch Tool estimates a 96.1% chance of a quarter-point rate cut and a 3.9% chance of a half-point cut.
The Fed is expected to cut the benchmark Federal Funds Rate by a quarter point in response to mounting evidence of a weakening labor market.
JPMorgan’s warning over expected Fed rate cut
According to Bloomberg, Kelly wrote that Wall Street bond and stock investors, who have been cheering over the Fed’s expected resumption of interest rate cuts, should instead take a cautious stance and look to diversify after the recent rally.
“To the extent that the Fed’s decision this week is seen as a capitulation to political pressure, a new layer of risk is being added to U.S. financial markets and the dollar,” Kelly said.
He said that “markets are frothy” and easing now is more likely to weaken demand than increase it, which will “ultimately be negative for stocks, bonds, and the dollar.”
“By the fourth quarter of this year, inflation could be 1.2 percentage points above the Fed’s target and rising, while unemployment would be just 0.3 percentage points above their target and stable,” Kelly wrote. “If this is the outlook, why should the Fed cut at all?”
Related: Can the president fire a Federal Reserve governor?
Kelly isn’t alone in predicting that the record-setting stock rally could end once the Fed resumes cutting rates.
Strategists from Morgan Stanley, JPMorgan Chase & Co. and Oppenheimer Asset Management also warned that a more cautious tone may replace the bullish mood as investors focus instead on a potential economic slowdown.
Stephen Miran joins Fed Board of Governors
Miran’s temporary placement on the board ends Jan. 31, but he is allowed to stay indefinitely until a permanent placement is named or President Trump appoints him to hold the seat permanently.
He raised eyebrows during the Senate confirmation hearing when he revealed he would only take a leave from the Council of Economic Advisors, and not resign.
Democrats and other economists and market watchers said the action would tighten the president’s control of the board.
Fed Governor Lisa Cook keeps her role for the time being
A federal appeals court on Sept. 15 rejected an emergency request by the Trump administration to remove Federal Reserve Governor Lisa Cook ahead of this week’s meeting.
The White House said it would appeal.
President Trump attempted to fire Cook last month over unsubstantiated allegations of mortgage fraud.
The Department of Justice is investigating.
Related: Fed rate cut could boost your wallet, job, and portfolio