Introduction: As the US Federal Reserve (FED) approaches a new monetary policy decision, the central question is: Will Jerome Powell bow to political pressure and initiate a rate cut on May 7? To answer this question, it is essential to look back at the institutional framework of the FED and the historical precedents that shed light on the current stakes. Created by the Federal Reserve Act of 1913, the FED is founded on a fundamental principle: its independence from the executive branch. This principle ensures that its monetary decisions, particularly with regard to interest rates, are not dictated by political considerations, but by macro-economic factors.
1) The independence of the FED is enshrined in law
The independence of the FED is enshrined in law. Its Chairman, appointed for a four-year term, can only be removed by the President of the United States for "just cause", in other words, gross misconduct, a provision designed to prevent any attempt at direct political interference. This institutional bulwark was put to the test in the 1970s, when a landmark episode pitted Richard Nixon against Arthur Burns, then Chairman of the FED. In a bid to stimulate the economy before the 1972 presidential election, Nixon put intense pressure on Burns to lower interest rates, despite inflationary signals. Burns eventually relented. While this accommodating monetary policy initially bore electoral fruit, it also triggered a long period of inflation and a severe economic crisis. Today, this episode remains a historic lesson in the consequences of an FED subject to political will.
2) On the macroeconomic front, Powell should wait beyond May 7
In 2025, the FED finds itself under pressure again, this time from Donald Trump, but current economic conditions do not justify hasty action. Although inflation is slowing, with the PCE index close to the 2% target in nominal terms, several factors argue in favor of the status quo. Firstly, US household inflation expectations, as measured by the University of Michigan index, remain high. Secondly, U.S. companies face uncertainty about how to deal with the tariffs: should they pass on costs to consumers or cut their margins? Finally, despite existing economic room for manoeuvre, macroeconomic signals are not clear enough to justify an immediate rate cut.
Conclusion: History shows that giving in to political pressure can be costly for the US economy. Jerome Powell seems aware of this responsibility and should adopt a measured wait-and-see strategy. May 7 will probably not be the day of the long-awaited monetary turnaround, but more likely the monetary policy decisions of June or July if disinflation is confirmed and a trade agreement is reached between the USA, China and the EU.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
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Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
1) The independence of the FED is enshrined in law
The independence of the FED is enshrined in law. Its Chairman, appointed for a four-year term, can only be removed by the President of the United States for "just cause", in other words, gross misconduct, a provision designed to prevent any attempt at direct political interference. This institutional bulwark was put to the test in the 1970s, when a landmark episode pitted Richard Nixon against Arthur Burns, then Chairman of the FED. In a bid to stimulate the economy before the 1972 presidential election, Nixon put intense pressure on Burns to lower interest rates, despite inflationary signals. Burns eventually relented. While this accommodating monetary policy initially bore electoral fruit, it also triggered a long period of inflation and a severe economic crisis. Today, this episode remains a historic lesson in the consequences of an FED subject to political will.
2) On the macroeconomic front, Powell should wait beyond May 7
In 2025, the FED finds itself under pressure again, this time from Donald Trump, but current economic conditions do not justify hasty action. Although inflation is slowing, with the PCE index close to the 2% target in nominal terms, several factors argue in favor of the status quo. Firstly, US household inflation expectations, as measured by the University of Michigan index, remain high. Secondly, U.S. companies face uncertainty about how to deal with the tariffs: should they pass on costs to consumers or cut their margins? Finally, despite existing economic room for manoeuvre, macroeconomic signals are not clear enough to justify an immediate rate cut.
Conclusion: History shows that giving in to political pressure can be costly for the US economy. Jerome Powell seems aware of this responsibility and should adopt a measured wait-and-see strategy. May 7 will probably not be the day of the long-awaited monetary turnaround, but more likely the monetary policy decisions of June or July if disinflation is confirmed and a trade agreement is reached between the USA, China and the EU.
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.