The market has begun trading on the "loss of Federal Reserve independence": US stocks, bonds, and gold are the most affected.

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Market concerns over the Federal Reserve’s independence are appearing in trades across multiple asset classes.

According to information from the “Chasing Wind Trading Desk”, JPMorgan analyst Nikolaos Panigirtzoglou and his team recently released a report stating that concerns over the potential erosion of the Fed’s independence are quietly becoming a trading theme in markets, particularly evident in U.S. equities, bonds, and the gold market.

Over the past month, the Trump administration’s escalating political pressure on the Fed has sparked widespread concern among economists and analysts regarding central bank independence. Since Trump announced the nomination of Miran to fill the Fed Board vacancy on August 7, and threatened to fire Governor Cook on August 22, market worries over the Fed’s independence have continued to intensify.

Following these events, value stocks, commodities, and gold prices—which typically benefit from inflation worries—rose, while the 5-year/30-year U.S. Treasury yield curve steepened, and the dollar’s reaction was relatively muted.

The report points out that this “Fed independence trade” has shown limited impact in the FX market, with overall net USD positions remaining stable since Miran’s nomination. Meanwhile, risk appetite indicators based on relative positioning in risk and safe-haven currencies continue to send bullish signals for risk assets such as equities and credit.

Value Stocks and Gold Rise, Dollar Reacts Mildly

The market’s response to concerns over Fed independence shares some similarities with so-called “inflation trades”—but also has differences. Since the personnel changes became known in early August, asset price trends have diverged.

According to data compiled by JPMorgan, from August 6 to September 3, the Dow Jones Market Neutral Value Index rose 6.5%, gold prices rose 4.9%, while the S&P 500 rose only 1.1% in the same period. In the commodities sector, the Bloomberg Commodity Index (BCOM) rose 3.5%.

The report points out that these assets usually perform well when inflation expectations rise, implying the market believes a less independent Fed might tolerate higher inflation to stimulate an “overheating” economy.

In the bond market, the 5-year/30-year U.S. Treasury yield curve steepened by 19.5 basis points. By contrast, both the broad dollar index and the 5y/5y forward inflation swap (an indicator of long-term inflation expectations) showed relatively muted reactions.

The report notes that the dollar even rebounded during the selloff in stocks and bonds on September 2, showing that the trading logic around this theme is less clear in the FX market than in other asset classes.

Bond Market Bets on Curve Steepening

Concerns over Fed independence are particularly prominent in bond market pricing, especially in bets on the shape of the yield curve. A Fed with impaired independence may implement more dovish policy, suppressing front-end rates and leading to a steeper curve.

JPMorgan’s tracking of major bond ETF short positions shows that since the beginning of August, and especially after August 21, short positions in the IEI ETF (tracking 3–7-year Treasuries) relative to shorts in the TLT ETF (tracking 20-plus-year Treasuries) have decreased. The report interprets this as evidence of rising bets in line with the “Fed independence trade” and a steeper curve.

In addition, short positions in the TIP ETF (tracking inflation-protected bonds) have declined after August 19, while TLT ETF shorts have increased. This change coincided with initial media reports about pressure to investigate Governor Cook, reflecting market concerns over long-term inflation (“breakeven inflation rate widening”).

Value Rotation is the Main Stock Market Theme, Gold Directly Benefits

Investor positioning in equities and commodities also confirms this trading theme.

In equities, rotation into value stocks has become the core feature of the “Fed independence trade.”

Report analysis shows that the short interest spread between “short value” and “long value” stock baskets widened “quite sharply and discontinuously” after Miran’s nomination on August 7, in line with the trend of investor rotation into value stocks.

In the commodity space, gold is seen as a more direct manifestation of the “Fed independence trade.” Futures positioning data shows that after news broke on Cook potentially being dismissed, long positions in gold futures “spiked,” while the increase in oil futures positions was more modest.

The report argues that while one motivation for pushing the Fed to cut rates is to support growth (which generally benefits commodity prices), gold, as a safe-haven and anti-inflation asset, is more sensitive to central bank credibility changes.

Dollar Positioning Shows Caution

Unlike other assets, the FX market has shown the most muted reaction to the “Fed independence trade.”

The report’s analysis finds that for the USD, the “inflation trade” and “Fed independence trade” logics are contradictory. On one hand, if a surprise inflation uptick prompts the Fed to react with a more hawkish stance, raising real U.S. interest rates, this would be bullish for the dollar. On the other, a more dovish Fed due to political pressure—resulting in lower front-end rates—would be bearish for the dollar.

Position data shows this split has led to a cautious market stance.

According to CFTC data, after USD short covering in July to August 5, the bullish momentum for the dollar halted abruptly after Miran’s nomination on August 7. Since then, net short positions in USD futures have been “basically unchanged.” This indicates investors have not taken active positions on this theme before a clearer dollar direction emerges.

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The above content is from Chasing Wind Trading Desk.

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