Schroders’ Group CIO has warned that a “politically-induced Fed is a very real reality”.
Johanna Kyrklund said Donald’s Trump’s “aggression” towards the central bank means “we could be in a world where they’re cutting rates actually in a way that’s not warranted by economic conditions”.
The US president has been a long-time critic of current Fed chair Jerome Powell and has clashed with him on numerous occasions during his second term in office.
Trump’s frustrations with Powell have largely centred around refusal to further lower interest rates to fit with the administration’s agenda.
US Fed independence and geopolitics key risks to markets
Earlier this month, the Department of Justice announced it had opened a criminal investigation into Powell – something of which Trump claimed to have no prior knowledge.
Speaking at Schroder’s annual Adviser Forum in London today (21 January), Kyrklund said she felt this political pressure could have repurcussions.
“When Trump first got elected, we said the thing we’re most concerned about is how he treats the central bank,” she said.
“The central bank credibility is quite a fundamental plank of the system that we’ve had in recent decades.
“And as much as we thought that was the key risk, we have been consistently surprised by just how aggressive he’ [Trump] been towards the Federal Reserve.”
Schroder’s investment propositions director Stuart Podmore, referring to the firm’s most recent adviser survey, said advisers who had anticipated that we are in for a period of higher inflation were “on the money”.
Schroders has consistently expected interest rates to stay “higher for longer”, he said, and has been sceptical that central banks should be cutting as aggressively as markets expect.
“We might be right on inflation, but we could be wrong on the rate call, if they (Fed) end up going down that path where we end up with a politically induced Fed, which is a very real reality now,” Kyrklund added.
That risk has reshaped portfolio construction. Schroders prefers gold over government bonds as a hedge, citing both geopolitical risk and concerns over debt sustainability.
Bonds, Kyrklund argued, no longer provide the diversification they once did in a deglobalised, inflation-prone world.
Equity valuations, meanwhile, are rich, and correlations between stocks and bonds are rising. The answer, she stressed, is not to retreat into cash, but to diversify more intelligently – across regions, styles and asset classes – while remaining invested.