The Fed’s Historic Mistake: Politics, Tariffs, and the Bond Market Warning

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The Fed’s Historic Mistake: Politics, Tariffs, and the Bond Market Warning

Jerome Powell’s Jackson Hole speech last Friday gave Wall Street what it wanted: the door is now open for another Fed rate cut. Stocks jumped and bonds rallied.

But beneath the market cheer is a disturbing reality. Something unprecedented is happening: 10-year Treasury yields are rising even after rate cuts began. Normally, when the Fed cuts rates, long-term yields drop. Instead, since the Fed started easing in September 2024, the 10-year yield has climbed 70–100 basis points. This is the bond market flashing a red warning light.

 

Tariffs and Inflation: A Dangerous Assumption

The Fed keeps suggesting tariff-driven inflation is “temporary.” As a trader, I don’t buy that. Tariffs are structural; they permanently raise prices of imported goods, and in effect, raise the baseline cost of living. JPMorgan estimates tariffs could add 1–1.5 percentage points to inflation; Yale’s studies say as much as 2.3 percentage points.

Clearly, this is not a minor hiccup. Yet the Fed seems willing to ease even while core PCE inflation sits at 2.9%, above the 2% target. Cutting rates in that environment looks more like wishful thinking than sound policy.

 

Trump’s Influence on the Fed

Another factor traders cannot ignore is politics. The Fed is designed to be independent, pero obvious ngayon na malakas ang pressure ni President Trump.

  • He attacks Powell almost daily.
  • His Treasury Secretary Scott Bessent openly calls for deeper cuts.
  • Governor Adriana Kugler resigned earlier this month, opening another seat for a dovish Trump appointee.
  • And just recently, Trump moved to fire Fed Governor Lisa Cook, citing questionable allegations.

I see this as indirect but powerful influence. Hindi naman pwedeng basta tanggalin ni Trump ang isang Fed Governor without legal battle, pero the pressure is enough. The market sees that independence is being compromised.

 

The Bond Market Sees Through It

That’s why the 10-year Treasury yield is rising. Investors demand a higher term premium, basically, extra compensation for the risk that future inflation will be worse than the Fed admits. The bond market is saying: “We don’t trust Powell, we don’t trust this framework shift, and we don’t trust the politics behind it.”

As forex traders, we watch bonds closely because they’re the truth-tellers of the financial system.

 

How a Forex Trader Should React

In the Philippines, the most common retail trades are GOLD (XAUUSD) and EURUSD. Here’s how this environment translates:

  1. Gold (XAUUSD)
    • Rising yields usually hurt gold (no yield asset), pero this time, uncertainty + inflation hedging are pushing gold demand.
    • If the Fed cuts into inflation, expect gold to remain supported as a safe haven.
  2. EURUSD
    • Political pressure on the Fed weakens the USD’s credibility.
    • If Europe stabilizes and U.S. yields reflect inflation fears rather than growth, EURUSD can push higher.
    • But volatility will spike around FOMC and tariff-related news.

The strategy is not just to ride trends blindly but to understand the why behind price moves. Right now, the “why” is politics undermining central bank credibility and tariffs fueling sticky inflation.

 

My Sentiment

This is more than just numbers. Nakakabahala kasi we’ve seen this before—2021 “transitory inflation” narrative na mali pala. If the Fed repeats that mistake while under Trump’s shadow, credibility will take decades to rebuild.

As a trader, I react with caution. I see opportunity in volatility but I prepare for sudden whiplash if inflation surprises higher and the Fed is forced to reverse course. For my students, the lesson is clear: always respect the bond market signals, and never underestimate the influence of politics on monetary policy.

 

👉 Bottomline: Trump’s influence, Fed’s framework shifts, and tariff-driven inflation combine into a dangerous mix. The bond market is already pricing in this uncertainty. For forex traders, that means gold and EURUSD will remain battleground pairs—volatile, but full of opportunity if you understand the forces at play.

 

Notes:

What is the 10-Year U.S. Treasury Bond?

  • Definition: A 10-year U.S. Treasury bond is a loan you give to the U.S. government. You earn fixed interest (coupon) every six months, and you get your money back after 10 years.
  • Why It’s Important:
    • It’s considered the safest asset in the world.
    • It sets the benchmark interest rate for mortgages, loans, and investments worldwide.
  • Bond Prices vs. Yields:
    • When investors buy bonds heavily → prices rise, yields fall.
    • When investors sell bonds (demanding higher return for risk) → prices drop, yields rise.
  • Trading Impact:
    • Rising 10-year yields usually mean investors expect higher inflation or higher uncertainty.
    • Forex traders use it as a signal: it influences the USD, gold, and major currency pairs.

👉 Think of the 10-year bond as the world’s financial thermometer. If it’s heating up, it’s telling us inflation and uncertainty are rising, even if central bankers say otherwise.