As geopolitical events across the Middle East escalated and then defused within two weeks, bond investors are once again more focused on central bank activity, tariffs and governments’ fiscal positions.
President Donald Trump’s sweeping tax-cut and spending bill is still being hotly debated in the Senate. Republican leaders are pushing to get Trump’s so-called “big, beautiful bill” through Congress and to his desk before the 4 July holiday next week, although there are many disagreements between party hardliners and moderates over the spending bill, which would add trillions to the $36.2 trillion national debt.1 Another key deadline investors are watching is 9 July, the end of the 90-day pause on Trump’s “reciprocal” tariffs, which still have the capacity to upend markets.
Even though the US faces some significant events in coming weeks, this has not stopped Trump from attacking Federal Reserve Chairman Jerome Powell, who earlier this week provided his semi-annual monetary policy report to Congress. Trump has been trying to influence the Fed to cut rates for some time, and given his constant criticisms of Powell, who remains steadfast about not cutting rates anytime soon, another date on investors’ minds is May 2026, when Powell’s term ends. Reports this week suggest Trump may look to announce a new chair in coming weeks or months,2 a process which involves the president nominating a candidate generally from the current members of the Board of Governors, and then a Senate confirmation.
Although Powell has authority over the direction of interest rates until the end of his term, the news this week that Trump is considering alternative candidates for the Fed chair role could potentially undermine Powell’s authority as investors and perhaps other members of the Federal Open Market Committee may be swayed by the incoming chairman. Markets have already begun pricing in lower rates as consequence. The group of potential replacements and close economic advisors – many who share Trump’s preference for lower interest rates and a more politically aligned Fed – has been dubbed the “shadow Fed”.3
Even as markets have been pricing in a rate cut later this year, Powell remained firm in his latest testimony, reiterating that the Fed is “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance”. He also noted that any tariff inflation would become evident in June and July and as such, it is likely he will wait until September before deciding whether it’s appropriate to lower rates further.4
Three-month annualized headline and core CPI (Consumer Price Index) data – key economic indicators which track the cost of living over time – came in at 1% and 1.7% in May respectively,5 which led to increasing optimism that the tariff pass-through to customers may be smaller than initially feared. However, the Fed’s new projections show inflation picking up as growth slows and unemployment ticks up. This presents challenges to the Fed’s dual mandate of maximum employment and stable prices.
Powell has implied he would rather be late and maintain the capacity to reduce interest rates should the economy slow down, rather than cut rates now and fear facing higher inflation and broader questions about the economy. Trump’s apparent rush to appoint a new chair has weakened the dollar further, as expectations of lower rates and elevated inflation reduce confidence in the greenback. Therefore, any rumours around a new Fed chair will likely cause larger market swings compared with historical nominations.
Given the complex mix of political posturing, fiscal uncertainty, and evolving inflation data, the Fed’s independence has never been more critical, or more tested. Powell has maintained a cautious, data-driven approach, but the growing influence of the so-called “shadow Fed” reflects a deeper shift in how investors are looking at future monetary policy. For now, Powell remains in charge, but the countdown to 2026 has already begun.
[2] Reuters: https://www.reuters.com/world/us/trump-says-he-is-considering-three-or-four-candidates-next-fed-chair-2025-06-25/
[3] Wall Street Journal: https://www.wsj.com/economy/central-banking/trump-next-federal-reserve-chair-powell-d3edcb9c
[4] Deutsche Bank
[5] Bureau of Labor Statistics
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