Trump's push for lower interest rates intensifies
It was early February. I was sitting with a group at Gamba's in Merrillville having an always delightful lunch, attending a meeting hosted by a well-known investment and mutual fund company. The material was called "The Year Ahead" and was being presented by a young, fixed income (bond) analyst from the hosting firm.
The presenter was talking about inflation and the economic cycle, and as the new administration had just taken the reins in Washington, he was doing his best to stay apolitical. The attendees of course all wanted to hear about what the Trump administration may mean to markets, but the speaker was carefully dodging with the message that Trump was not going to be nearly as disruptive as his rhetoric, and how actions at the Federal Reserve were going to be far more important in 2025 than anything the Trump administration may be able to get done with its thin congressional majority.
With this postulate driving the firm's fixed income decision making, they expected inflation to cool off, the Fed to cut short term interest rates by mid-year and interest rates along the entire yield curve to drop through the rest of the economic cycle.
The conventional investment logic is, if an investor expects interest rates to fall then longer-term bonds become more attractive because they enable the investor to "lock in" higher yields, and bonds with higher interest rates (coupons) should logically become more valuable and rise in price during this type of scenario. In investment lexicon, the length of time it takes to recoup capital from a bond is called "duration," and when an investment strategy is seeking longer term bonds we refer to this as "adding duration." The presenting firm was therefore discussing adding duration to bond portfolios, in anticipation of falling interest rates in 2025.
I listened intently as I reveled over a perfectly constructed chicken marsala. The whole lunch was too delicious, and I needed to pause putting more of that amazing Gamba's Italian sourdough bread on my plate -- so I thought I would disengage from eating, sit back and whip up the room a bit.
"So, you think the Trump administration is going to be simply more of the same?" I started when he called on my raised hand. "We do -- we don't think policy will align with the rhetoric and don't expect much on the fiscal side this year," was the confident answer.
"Well," I continued, "can you imagine a scenario where inflation does cool off, Trump demands lower interest rates, and Powell (the Fed Chair) doesn't react or doesn't comply fast enough, and then Trump starts going after Powell and the Fed, maybe even firing Powell?"
"This sounds like a conspiracy theory," he answered. "We can't manage to conspiracy theories, and besides the separation between the Fed and the government is irreproachable. Trump won't cross that line."
"Ok," I continued, "but in this apparently highly unlikely scenario, wouldn't it be feasible that this type of disruption could drive shorter term rates lower as Powell gets bullied or fired by Trump, and longer-term rates higher as the bond market anticipates inflation reigniting?"
He rolled his eyes a bit as he considered my logic. "Yeah, that could be the result if this were to ever happen, which it won't. We think it's pretty safe to add duration at this point." Side note: longer duration bonds get hurt during periods of rising interest rates, so in dismissing my scenario he was defending the firm's decision to add duration risk to their strategies. I decided I had caused enough trouble and went back to the marsala, using the bread to soak up the sauce. Wonderful.
Well, seven months in, this highly unlikely scenario is starting to heat up. After using a variety of colorful names in the press to describe Fed Chair Powell for not lowering interest rates in alignment with the administration's economic objectives, the White House has now ramped up its criticism of the Fed and the Chairman specifically, regarding the central bank's $2.5 billion renovation of its Washington headquarters. Apparently the project is experiencing extreme cost overruns and completion delays. Trump despises nothing more than cost overruns on a real estate project, and criticism of this project is starting to involve calls for Powell to be ousted.
Trump does not appear to share the view of the separation of the Fed and the government as sacrosanct, and my understanding of the MAGA base is it clearly doesn't hold the Fed as above reproach. Treasury Secretary Bessent made clear in February, the Trump administration wants lower interest rates, and I would not want to be the guy standing in the way of this goal. This situation is emerging and still very fluid but could disrupt markets as it plays out. It's not the number one thing I am watching, but it is definitely high on the list.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
