Analysts warn: Fed's declining credibility could be the next catalyst for gold prices
2025-07-18 12:10:18
Rising political tensions between President Trump and the Federal Reserve have shaken investor confidence, with analysts warning that any blow to central bank independence could send gold prices soaring.
President Trump has never been shy about expressing his displeasure with Federal Reserve Chairman Jerome Powell for maintaining the central bank’s current neutral monetary policy stance. Trump recently said interest rates should be cut by at least 3%, which would put rates in a range of 1.25% to 1.50%.
Over the past few months, Trump has launched personal attacks, calling Powell a "dumb," "idiot," "stupid" and nicknamed him "Mr. Too Late." But the rhetoric has intensified in recent days.
William Pulte, chairman of the boards of Fannie Mae and Freddie Mac, helped spread the false rumor last Friday that Powell was considering resigning. In an official statement, Pulte said: "I am encouraged by reports that Powell is considering resigning. I believe it would be the right decision for America and the economy will prosper."
It was revealed that Trump discussed the possibility of firing Powell with Republican lawmakers on Tuesday, but he later changed his tone and said that was "extremely unlikely."
Uncertainty surrounding the Federal Reserve's leadership is injecting new volatility into markets, an environment that analysts say will only worsen as concerns grow about the central bank's independence.
In a report published Thursday, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, described the Fed's independence as its "superpower."
She said: "This attack on the independence of the Federal Reserve could have serious consequences. Not only would the dollar and U.S. Treasuries plummet, but the Fed would also lose a superpower: helping the Fed support volatile financial markets by purchasing billions of dollars in U.S. Treasuries. Remember, the United States and a few privileged economic regions are unique in that their central banks buy their debt to support government bonds, which is due to credibility. If this credibility is lost, the Fed loses its most important tool. If quantitative easing and the Fed's continuous expansion of its balance sheet have worked so well over the past few decades, it is because the Fed enjoys a credibility that few other institutions have. If this credibility disappears, lowering interest rates will seriously damage the dollar and U.S. Treasuries."
In this environment, Ozkardeskaya advised investors to keep a close eye on safe-haven assets , noting: “It looks like the Fed could take some big action this fall.”
She pointed to Turkey’s central bank as an example of an institution that lost credibility after losing its independence. From 2018 to 2023, Turkish President Recep Tayyip Erdogan implemented a policy of continuous rate cuts and currency intervention even as inflation soared to uncontrollable levels.
Michael Brown, senior market analyst at Pepperstone, also pointed out that Turkey’s economic turmoil is a warning to U.S. investors. He added that such an environment would be good for gold.
“It’s not exactly a hopeful or reassuring sign when one has to hold up Turkey as an analogy for how monetary policy might eventually be formulated,” he said in a note. “And, in any case, yesterday’s reaction supports my long-held bearish view: a USD sell-off rally at a time when any pretense of monetary policy independence continues to erode at a fairly rapid pace.”
“It appears that the administration is looking to erode the independence of monetary policy, either now or when Powell’s successor is appointed in May next year,” Brown said. “In either case, this will spook international investors and ensure that reserve allocators continue to seek alternatives to the dollar. Clearly, this is where gold can shine.”
Naeem Aslam, chief investment officer at Zaye Capital Markets, said he is bullish on gold as the Federal Reserve's turmoil adds to geopolitical uncertainty in financial markets.
“If political tensions rise further and the Fed faces more pressure from the White House, the most likely scenario is increased market volatility,” he said. “Gold is likely to be used more as a store of value given its past role as a safe haven during times of political and economic turmoil.”
Jim Wyckoff, senior market analyst at Kitco.com, also said he expects gold prices to rise if Trump follows through on his initial threat to fire Powell.
“Trump firing Powell would surprise the market and drive safe-haven demand into gold, which in turn could weigh on the dollar index, at least initially,” he said.
Some analysts suspect Trump’s comments are an attempt to test the waters for a change in Fed leadership. Marc Chandler, managing director of Bannockburn Global Forex, said the balloon is “floating like a zeppelin.”
Analysts also point to a growing number of fundamental factors supporting gold prices, with the central bank drama being just the latest in a growing list of factors. Like Trump's ongoing trade war, they say anything that threatens the dollar's status as the world's reserve currency will ultimately push gold prices higher.
Despite the increase in investment demand this year, analysts stressed that central bank demand remains the key factor behind gold's historic rally over the past three years, with some expecting global central banks to add another 1,000 tonnes of gold to their reserves this year, for the third consecutive year.
While market analysts at TD Securities said it was unlikely that Trump would fire Powell before his term expires in May 2026, they said creating a "shadow chair" on the committee could be an option. But they warned that would have a similarly disruptive effect on broader financial markets.
“In this scenario, monetary policy guidance will be diluted as there is no central message to rely on, which will complicate one of the avenues the Fed uses to manage expectations,” the analysts wrote. “The Fed’s shadow chair could be the next big worry for the dollar, especially given the funding risks posed by the widening fiscal deficit. If the Fed starts to lose credibility, this will shorten the path for the FX value trade (dollar sell-off). This could trigger the next leg of the dollar’s decline, accompanied by a steeper curve and a further reversal of the historical relationship with the 10-year Treasury yield. ”
Spot gold daily chart source: Yihuitong
At 12:10 Beijing time on July 18, spot gold was quoted at $3335.91 per ounce
President Trump has never been shy about expressing his displeasure with Federal Reserve Chairman Jerome Powell for maintaining the central bank’s current neutral monetary policy stance. Trump recently said interest rates should be cut by at least 3%, which would put rates in a range of 1.25% to 1.50%.
Over the past few months, Trump has launched personal attacks, calling Powell a "dumb," "idiot," "stupid" and nicknamed him "Mr. Too Late." But the rhetoric has intensified in recent days.
William Pulte, chairman of the boards of Fannie Mae and Freddie Mac, helped spread the false rumor last Friday that Powell was considering resigning. In an official statement, Pulte said: "I am encouraged by reports that Powell is considering resigning. I believe it would be the right decision for America and the economy will prosper."
It was revealed that Trump discussed the possibility of firing Powell with Republican lawmakers on Tuesday, but he later changed his tone and said that was "extremely unlikely."
Uncertainty surrounding the Federal Reserve's leadership is injecting new volatility into markets, an environment that analysts say will only worsen as concerns grow about the central bank's independence.
In a report published Thursday, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, described the Fed's independence as its "superpower."
She said: "This attack on the independence of the Federal Reserve could have serious consequences. Not only would the dollar and U.S. Treasuries plummet, but the Fed would also lose a superpower: helping the Fed support volatile financial markets by purchasing billions of dollars in U.S. Treasuries. Remember, the United States and a few privileged economic regions are unique in that their central banks buy their debt to support government bonds, which is due to credibility. If this credibility is lost, the Fed loses its most important tool. If quantitative easing and the Fed's continuous expansion of its balance sheet have worked so well over the past few decades, it is because the Fed enjoys a credibility that few other institutions have. If this credibility disappears, lowering interest rates will seriously damage the dollar and U.S. Treasuries."
In this environment, Ozkardeskaya advised investors to keep a close eye on safe-haven assets , noting: “It looks like the Fed could take some big action this fall.”
She pointed to Turkey’s central bank as an example of an institution that lost credibility after losing its independence. From 2018 to 2023, Turkish President Recep Tayyip Erdogan implemented a policy of continuous rate cuts and currency intervention even as inflation soared to uncontrollable levels.
Michael Brown, senior market analyst at Pepperstone, also pointed out that Turkey’s economic turmoil is a warning to U.S. investors. He added that such an environment would be good for gold.
“It’s not exactly a hopeful or reassuring sign when one has to hold up Turkey as an analogy for how monetary policy might eventually be formulated,” he said in a note. “And, in any case, yesterday’s reaction supports my long-held bearish view: a USD sell-off rally at a time when any pretense of monetary policy independence continues to erode at a fairly rapid pace.”
“It appears that the administration is looking to erode the independence of monetary policy, either now or when Powell’s successor is appointed in May next year,” Brown said. “In either case, this will spook international investors and ensure that reserve allocators continue to seek alternatives to the dollar. Clearly, this is where gold can shine.”
Naeem Aslam, chief investment officer at Zaye Capital Markets, said he is bullish on gold as the Federal Reserve's turmoil adds to geopolitical uncertainty in financial markets.
“If political tensions rise further and the Fed faces more pressure from the White House, the most likely scenario is increased market volatility,” he said. “Gold is likely to be used more as a store of value given its past role as a safe haven during times of political and economic turmoil.”
Jim Wyckoff, senior market analyst at Kitco.com, also said he expects gold prices to rise if Trump follows through on his initial threat to fire Powell.
“Trump firing Powell would surprise the market and drive safe-haven demand into gold, which in turn could weigh on the dollar index, at least initially,” he said.
Some analysts suspect Trump’s comments are an attempt to test the waters for a change in Fed leadership. Marc Chandler, managing director of Bannockburn Global Forex, said the balloon is “floating like a zeppelin.”
Analysts also point to a growing number of fundamental factors supporting gold prices, with the central bank drama being just the latest in a growing list of factors. Like Trump's ongoing trade war, they say anything that threatens the dollar's status as the world's reserve currency will ultimately push gold prices higher.
Despite the increase in investment demand this year, analysts stressed that central bank demand remains the key factor behind gold's historic rally over the past three years, with some expecting global central banks to add another 1,000 tonnes of gold to their reserves this year, for the third consecutive year.
While market analysts at TD Securities said it was unlikely that Trump would fire Powell before his term expires in May 2026, they said creating a "shadow chair" on the committee could be an option. But they warned that would have a similarly disruptive effect on broader financial markets.
“In this scenario, monetary policy guidance will be diluted as there is no central message to rely on, which will complicate one of the avenues the Fed uses to manage expectations,” the analysts wrote. “The Fed’s shadow chair could be the next big worry for the dollar, especially given the funding risks posed by the widening fiscal deficit. If the Fed starts to lose credibility, this will shorten the path for the FX value trade (dollar sell-off). This could trigger the next leg of the dollar’s decline, accompanied by a steeper curve and a further reversal of the historical relationship with the 10-year Treasury yield. ”
Spot gold daily chart source: Yihuitong
At 12:10 Beijing time on July 18, spot gold was quoted at $3335.91 per ounce
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