'Own goal': investment fund managers on risks over Trump's fight with the Fed

U.S. President Donald Trump's pressure on the independence of the U.S. Federal Reserve is having the opposite effect and contradicts his own goal of lowering borrowing costs, according to asset managers of large bond funds polled by Bloomberg. In their view, undermining confidence in the U.S. central bank creates a new risk premium in the markets that will keep interest rates high, contrary to the White House's wishes.

Asset managers in the giants of the debt securities market - Pimco, PGIM and DWS Group - agree that by putting pressure on the Fed, the U.S. administration poses a serious threat to financial stability. If the market doubts the Fed's ability to independently fight inflation, traders will start selling off U.S. government bonds. This will lead to an increase in their yields, followed by a rise in the price of mortgages and corporate loans, they warned.

Gregory Peters, co-director of investments at PGIM Fixed Income, which has about $900 billion under management, compared the latest threats by the U.S. Justice Department to bring criminal charges against Fed Chairman Jerome Powell to the actions of a soccer player who scores a goal against his own team. According to him, the markets will react very nervously to the Fed becoming a "source of instability", and what is happening is definitely contributing to investors' risk aversion.

Daniel Ivasin, Chief Investment Officer at Pimco, agrees with Peters. Markets like predictability, so any risks to the Fed's independence in terms of monetary policy decisions are fraught with unintended consequences - simply put, higher rates, he emphasized.

Despite Trump's attacks on the Fed, traders in the government debt market - so-called "bond vigilantes" - have not yet become fully active, said DWS Americas head of fixed income George Catrambone. He compared what is happening to the market's reaction to Trump's tariff threats: according to him, investors are still hoping that the president will "take his finger off the red button."

Trump has repeatedly criticized the Fed for easing policy too slowly, arguing that it is slowing down the economy. Tensions reached a peak on Sunday, January 11, when it became known about the threat of criminal prosecution of Fed chief Powell in connection with the spending on the reconstruction of the central bank building in Washington. Powell himself said that the White House is using formal reasons to retaliate for the reluctance to reduce interest rates, and made it clear that he intends to work until the end of his term, expiring in May.

Regulators of other countries have come to the defense of the Fed. The heads of leading central banks, including ECB President Christine Lagarde, issued a joint statement in support of Powell on January 13. "Central bank independence is the cornerstone of price, financial and economic stability for the citizens we serve. It is therefore critical to maintain this independence with full respect for the rule of law and democratic accountability," they emphasized.

This article was AI-translated and verified by a human editor