The impending leadership change at the US Federal Reserve, with Fed chair Jerome Powell due to step down in May, can become a material source of market disruption as we move toward the next election cycle.
Until recently markets appeared relaxed about this risk, concentrating on potential successors and assuming institutional boundaries would hold. That confidence now looks misplaced.
What has changed is not simply the political backdrop but the environment in which monetary policy is being made. US President Donald Trump has shown an increasing willingness to act unilaterally, and pressure to reduce living costs is intensifying.
Interest rates are an obvious political lever. Commentary in the Economist and Financial Times has increasingly focused on the risk that the leadership transition becomes a vehicle for reshaping the Federal Reserve itself, bringing it into closer alignment with the US treasury department and the presidency. At that point the issue ceases to be about personalities and becomes one of institutional independence.
The interplay between personalities is very much in evidence, as Powell, repeatedly publicly chastised by Trump for not lowering interest rates further and faster, has confirmed that the US justice department has served subpoenas on the Fed. Reports indicate that prosecutors are threatening a possible criminal indictment tied to his testimony about the central bank’s headquarters renovation.
The $2.5bn renovation of the central bank’s headquarters made headlines last year, becoming another bone of contention between the Fed chair and the president, with Trump labelling the project excessively expensive. It is Powell’s denials of these claims in the middle of last year before the Senate banking committee that have now erupted into what Powell calls a politically motivated attempt to undermine the Fed’s independence.
While geopolitical tensions remain a supporting factor, gold increasingly appears to be acting as a hedge against institutional erosion and policy credibility rather than inflation alone.
This recent legal and political scrutiny surrounding the Federal Reserve’s leadership underlines how much the operating environment has shifted. The central bank that markets have relied on for decades is now functioning under different constraints, and investors should not assume future leadership will be willing — or able — to respond forcefully to inflation pressures if they re-emerge.
A central bank that is reluctant to tighten policy in the face of rising inflation would represent a meaningful change in regime, not a temporary deviation. If such a shift were to occur, the adjustment would almost certainly begin in bond markets. Inflation expectations would rise, long-term yields would reprice higher, and volatility would spread into currencies and equities.
Read: SA 10-year bond yield hits lowest since 2019
Recent analysis suggests bond markets are still not adequately pricing the possibility of a reconfigured Fed mandate, despite the inflationary bias such a change would imply.
Gold’s behaviour is consistent with this assessment. While geopolitical tensions remain a supporting factor, gold increasingly appears to be acting as a hedge against institutional erosion and policy credibility rather than inflation alone. In periods in which confidence in policy frameworks weakens, gold has historically served as a form of portfolio insurance rather than a return-seeking asset.
The metal last year delivered one of its best annual performances in decades, with gains well into the double digits throughout 2025 pushing it past $4,000/oz to end the year at almost $4,600/oz. It has continued its gains so far this year, surpassing the $5,000/oz on Monday.
For those watching for guidance about how the Fed will respond in an unpredictable time when its mandate may be subtly shifted, the implications are structural rather than tactical. This is not a case for bold forecasts or aggressive portfolio shifts, but an observation that policy risk has become more asymmetric and potentially more disruptive.
If central bank independence itself becomes uncertain, the central issue is not the timing of the next policy move but the consequences when policy outcomes diverge from long-standing expectations.
In this context, a weakening of central bank independence would be associated with more persistent drawdowns, higher and less predictable volatility, weaker diversification benefits, and a diminished capacity for policy to act as a reliable backstop during periods of stress.
• Dr Marais chairs Wealth Associates and is co-founder and chair of Carmel Wealth. He has been the president and CEO of Wells Fargo Asset Management; global head of multi-asset investments and portfolio solutions at Schroders; global head of portfolio management (active allocation), multi-asset and client solutions at BlackRock; and global head of investment strategy in the client solutions group at Barclays Global Investors. Earlier in his career he was a gold trader at the South African Reserve Bank and a bond trader at the World Bank Treasury.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.