Yes, we expect economic data to remain the primary driver of Federal Reserve policy decisions. Key institutional safeguards, such as Senate confirmation of nominees, the staggered nomination schedule, and legal safeguards, should help preserve the Fed’s independence. However, political pressure on the Fed has intensified under the Trump administration to a degree not seen in recent decades. This heightened pressure only adds to investor concerns about the stability of the Fed’s autonomy, regardless of whether those concerns ultimately materialize. This reality reinforces our view that the US dollar is more likely to weaken than strengthen in years ahead, supporting our current preference to overweight non-US assets.
On Sunday, January 11, it was revealed that the US Department of Justice is investigating Fed Chair Jerome Powell for his Senate testimony on building renovations for the central bank’s headquarters. The unprecedented action, potentially intended to pressure Powell into lowering interest rates, drew strong criticism from several former Fed chairs and Treasury secretaries as well as Powell himself. The news coincides with the US Supreme Court’s upcoming January 21 hearing on President Trump’s effort to remove Lisa Cook from the Fed’s Board of Governors, and his expected announcement this month of Powell’s replacement, whose appointment will take effect in May when Powell’s term ends.
Although political pressure on the Fed has increased, there are safeguards in place to prevent significant changes to policy formation. Any nominee must secure Congressional approval. This is true for President Trump’s upcoming Fed chair pick, which betting markets largely view as a race between Kevin Hassett and Kevin Warsh, both of whom are seen as aligned to some extent with President Trump’s dovish policy rate view. Notably, Republican Senator Thom Tillis—a member of the Senate Banking Committee—has vowed to block Trump’s Fed nominees until the probe on Powell is resolved, a stance publicly backed by key swing voter, Senator Lisa Murkowski.
Even with a new chair, the Fed’s structure ensures that no single individual or administration can dictate policy. The 12-member Federal Open Market Committee (FOMC) consists of seven governors, including the chair, and five regional Fed bank presidents, four of whom rotate as voting members each year. Governors serve staggered 14-year terms, with a new seat typically coming up for appointment every two years, preventing any administration from quickly reshaping the board. While outgoing chairs often depart when their leadership term ends, Powell may choose to remain as a voting governor until his term expires in January 2028, providing added continuity. Despite four current governors being Trump appointees (including Powell), their voting records show independence from White House preferences.
The Fed’s independence is also reinforced by legal safeguards. By law, the Fed is required to pursue maximum employment and stable prices—its dual mandate—which should constrain its ability to ignore inflation data or cut interest rates solely for political reasons. With today’s CPI release showing 2.7% year-over-year inflation in December, this level remains above the Fed’s 2% target, underscoring that inflation should remain a key consideration, alongside employment, when the Fed sets policy. Relatedly, the president’s authority to remove the Fed chair or other governors is generally understood to be limited to specific circumstances, such as misconduct or neglect of duty, rather than policy disagreements. Although recent US Supreme Court decisions have expanded certain aspects of executive authority, and the impending hearing on Lisa Cook’s removal will further test these boundaries, precedent has upheld protections for multi-member independent agencies like the Fed.
While risks remain, we believe these changes will influence the tone and cohesion of monetary policy rather than result in politically driven decisions. In other words, policy will continue to be shaped by the Fed’s dual mandate, committee majority agreement, and reliance on economic data. Still, perceptions matter. Although we do not expect the administration’s preferences to become the Fed’s primary driver, recent developments have likely eroded some investors’ confidence in the Fed’s independence. Against this backdrop, we see a greater likelihood of US dollar weakness in the years ahead, reinforcing our preference to overweight non-US assets in the current environment.
Justin Hopfer, Senior Investment Associate, Investment Strategy Office