Political interference in this week’s Fed decision is the big risk now worrying investors

Federal Reserve Chair Jerome Powell faces intense pressure. - MarketWatch photo illustration/Getty Images, iStockphoto

Surprisingly strong August retail sales released Tuesday were throwing investors a curveball a day before the Federal Reserve’s interest-rate decision, triggering a brief climb in Treasury yields and pushing gold GC00 past its prior record above $3,700 an ounce.

Yet any signs of political pressure influencing the U.S. central bank’s decision-making process will be the main focus for investors come Wednesday.

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“Ordinarily, you wouldn’t be looking for rate cuts here,” said James Egelhof, chief U.S. economist at BNP Paribas — pointing to inflation that’s still elevated and consumer spending that’s holding up, despite concerns about the labor market.

“But the political risk is simply infeasible,” Egelhof said of the Fed’s previous “watchful hold” stance. “We think the Fed is trying to minimize conflict with the administration. That means the Fed will deliver a reasonably predictable series of rate cuts over the next few months.”

Fed Chair Jerome Powell is expected to use the Wednesday’s press briefing to lay out his case for cutting short-term rates by 25 basis points as a way to thwart further weakness in the labor market. His guidance on the economy, inflation and future rate cuts also will be in closely followed.

“I am thinking they cut 25 basis points, but I could conceptually see the board members pushing back and saying, ‘No rate cut,’” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, who pointed to an appeals court’s decision on Monday that prevented President Trump from firing Fed governor Lisa Cook before this week’s meeting.

Pavlik doesn’t think the economy needs rate cuts right now, but he hopes the central bank will start cutting this week because it typically takes time for lower rates to filter into the economy, which could help the U.S. avoid a slowdown next year.

“You need to address it now, before it becomes a bigger issuer later on,” Pavlik said. Yet for the press briefing, Fed independence “is going to be the major focus.”

Risks to Fed independence

The odds on Tuesday favored 75 basis points of rate cuts this year, as well as the Fed’s short-term policy rate ending next year in a range of 2.75% to 3%, or 150 basis points below its current level, according to the CME FedWatch Tool.

Jitters in markets ahead of the meeting saw the S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP stock indexes struggle for direction near record territory, despite investors warming to the idea of more Fed rate cuts following a nearly nine-month hiatus.

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The bullish case for stocks has been that tariff-induced inflation ends up being a one-time event, massive spending on artificial intelligence can keep equities chugging higher and the Fed will pull off a soft landing for the economy.

Still, the prospect of rate cuts against the backdrop of a sluggish economy, inflation pressures and worries about the Fed’s independence have been bullish for investors seeking safety in gold.

The market already recognizes that the independence of the Fed is over “for as long as President Trump remains in office,” said Brien Lundin, editor of Gold Newsletter. “Powell and the majority of the current FOMC would like to resist Trump’s calls for rate cuts, but the jobs numbers and other data indicating a slowdown won’t allow them to.”

Michael Armbruster, co-founder and managing partner at futures brokerage Altavest, said Fed rate cuts can continue boosting gold prices beyond their nearly 41% gain so far in 2025, but that the multitrillion-dollar U.S. federal deficit, which “forces the Fed to print money to keep the U.S. Treasury solvent,” has been the real driver catapulting gold higher.

Gold futures for December delivery GCZ25 rose Tuesday to around $3,720 an ounce, according to FactSet, at last check. Another recent haven asset, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y, briefly popped up to 4.06% on Tuesday morning following the strong retail sales, but has since retreated to about 4.03%. Bond yields and prices move in the opposite direction.

Read: Gold keeps hitting record after record. Is it time to think about selling?

A hunt for yield

As with gold investors, the large U.S. deficit, threats to Fed independence and uncertainty around the legality of Trump’s tariffs have been concerns in the $29 trillion Treasury market.

Still, a series of weak reports on the labor market have been a big driver for falling longer-duration Treasury yields in recent weeks, especially as investors hunt for ways to lock in yield while they can still get it.

“Our view is the economy is still muddling along” even through there appears to be “good reason” for people to worry about their jobs, said Drew Matus, chief market strategist at MetLife Investment Management. “We are very much in the camp that the Fed needs to be cutting rates here.”

However, Matus, a former staffer at the New York Fed, thinks fears of the Fed losing credibility in the eyes of investors are overblown. For one thing, Powell isn’t likely to be persuaded to act beyond what the economic data tell him before his term expires next year.

“You’ve got nothing on that guy,” Matus said. The Fed also is a “much stronger institution than people give it credit for,” he added.

Yet David Kelly, chief global strategist at J.P. Morgan Asset Management, said in emailed comments that any Fed decision “seen as a capitulation to political pressure” would be a new risk for markets.

Kelly also thinks it’s a good time to consider a “cautious stance” in equities, as well as broad diversification into international and alterative investments, with the S&P 500 looking “frothy” at a recent 22.5 price-to-earnings ratio.

Another risk, which isn’t favored by the odds, would be a cut of 50 basis points by the Fed on Wednesday, said Seema Shah, chief global strategist at Principal Asset Management, in emailed comments Tuesday.

“Any decision to cut by 50 basis points at this stage would appear to be driven more by political pressure than economic necessity,” she said.

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