By James Glynn
SYDNEY--Regardless of who leads the U.S. Federal Reserve in the future, challenges to its independence over the last few years have likely permanently scarred its reputation, says a top strategist at asset manager Lazard.
"When it comes to central bank credibility, perceptions are reality," said Ron Temple, chief market strategist for the advisory arm of the U.S. firm, which has around $278 billion in funds under management.
Given the contentious way in which the Fed leadership transition has been playing out, Temple is worried that no matter the outcome, the damage to investor confidence has been done.
Financial markets anticipate that President Donald Trump's pick for the job, Kevin Warsh, will soon be confirmed as the next Fed chair, putting him at the helm of the world's most influential central bank amid mounting risks of slowing growth and accelerating inflation.
At a recent Senate confirmation hearing, Warsh told lawmakers that the Fed needed a serious shaking up, with "messier meetings" and "a good family fight"--a stance seemingly at odds with an institution that has cultivated discipline and consensus-based decision making.
The man Warsh is set to replace, Jerome Powell, has also said he won't be leaving right away, breaking a 75-year-old tradition of Fed chairs departing when a successor arrives.
Speaking at a news conference recently, Powell said he was staying on due to worries about what he called unprecedented legal attacks from the Trump administration.
"My concern is really about the series of legal attacks on the Fed, which threaten our ability to conduct monetary policy without considering political factors," Powell said. "I worry that these attacks are battering the institution."
Trump has waged a year-long campaign to pressure the Fed, which is supposed to be independent, to lower interest rates. That culminated in the U.S. Justice Department launching a criminal investigation into Powell on the allegation of misleading Congress about cost overruns on Fed-building renovations.
The Justice Department dropped that investigation last week. Powell said he would stay on as governor after his chairmanship ends May 15, "for a period of time to be determined." His term ends early 2028.
Against that backdrop, the temptation for investors over the next several years will be to suspect the worst of the FOMC's decisionmaking, said Temple at Lazard Financial Advisory.
The furore around the Fed also comes as government budgets worldwide come under mounting pressure, with rising debt set to drive bond yields higher, he added.
"I think you are going to see steeper yield curves across major developed economies over the next several years regardless of what the Fed does, because of the [government] deficits," the chief strategist said.
Temple forecasts that U.S. government debt will likely grow after the country's mid-term elections in November, which will likely see Democrats wrest control of the House of Representatives from the Republican party.
"We can say that with a high degree of confidence that the Democrats will control the House," he said, an outcome that will inevitably lead to a push to restore some of the Trump administration's spending cuts in critical areas like the Medicaid healthcare program.
"You could easily get a trillion dollars of additional spending over the next 8 years," Temple said.
Add in the cost of the Iran war and replenishing munitions, and the U.S. could be running deficits of 6.5% to 8.0% of gross domestic product every year for the next decade, he said. That would give the world's largest economy a debt-to-GDP ratio of about 140% by 2036.
"That, combined with any suspicions around Fed independence, is going to make people demand a higher premium on long-term bonds," Temple said.
Still, there's hope that markets can weather some of the storm surrounding the Fed.
Financial market participants don't have a strong understanding of how Warsh will vote on interest rates, but he is just one vote on the FOMC, so he can't unilaterally determine the outcome of policy meetings, Temple said.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
May 06, 2026 20:31 ET (00:31 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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