Playing with fire
Interest rates act like gravity on the value of all assets. The lower the rate, the weaker the gravitational force, allowing asset prices to float higher. The Federal Reserve (the Fed) has cut 175 basis points since the current rate-cutting cycle began on September 18, 2024. Since that time, the U.S. stock market, as measured by the S&P500, has risen 22.4 per cent.
As important as interest rates are for asset values, they are perhaps even more important to sentiment, when investors believe they are set based on economic data rather than the whims of politicians – whose own agendas may seek to destroy the benefits of monetary policy when driven by an independent central bank.
Federal Reserve Chairman Jerome Powell’s term as Fed Chair will end on May 15, and it is no secret that U.S. President Donald Trump is angry that Powell hasn’t cut interest rates further. So angry, in fact, that Trump has unleashed the Department of Justice (DOJ) to pursue Powell for potential criminal conduct. The threat to the Fed’s independence is something that should concern all investors.
After leaving rates on hold this week, Powell, at the press conference, spent the better part of the afternoon navigating a minefield of pointed questions with a singular, rhythmic deflection. Whether asked about President Trump’s potential successor, the Trump administration’s public criticisms of his leadership, the ongoing Department of Justice investigation, or the Supreme Court case regarding Governor Lisa Cook, Powell’s script remained remarkably static. He uttered the phrase “I have nothing on that for you” seven times, occasionally pivoting to “I don’t have anything on that for you” for an additional four rounds. By the time the dust settled, it was clear that Powell had no intention of engaging in the political fray during his final months in office.
The Federal Open Market Committee’s (FOMC) policy decision offered a cautiously optimistic view of a strong economy, noting that while the pace of employment has been weak, the unemployment rate has remained impressively low at roughly 4.4 per cent. Powell brushed off any immediate inflation concerns, predicting the pressure would moderate once the initial shock of the Trump administration’s tariffs begins to fade. By framing the risks of higher inflation and higher unemployment as perfectly equal, Powell essentially signalled that the Fed sees no urgent reason to move in either direction. Investors are likely to conclude rates will remain unchanged through his final two meetings.
Of course, after May, Trump wants lower rates. The market’s current optimism may be reflecting that outcome.
Nevertheless, for the moment, the Fed’s “wait-and-see” approach puts it at odds with the Trump administration. Administration officials, bolstered by two FOMC dissenters, are betting that a surge in productivity will allow the economy to grow rapidly while unit labor costs fall toward zero, justifying further rate cuts.
Of course, anyone who remembers Turkey’s Erdogan cutting rates and releasing hyperinflation of 75 per cent may think the U.S. administration’s logic is playing with fire. Lowering the federal funds rate from these levels also risks fueling a financial melt up –something we are also already seeing in the skyrocketing prices of precious metals – and could further weaken the U.S. dollar, which would revive the very inflationary pressures the Fed has fought to tame.
There are many clouds forming on the 2026 horizon, and this is just another one to watch.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
