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Good morning. President Donald Trump said yesterday that he was not concerned about the weakening dollar. The dollar got the message, falling 1.3 per cent against a basket of other major currencies, while gold (about which more below) rose 3.5 per cent. Email us: unhedged@ft.com.
Rick Rieder as Fed chair
Less than two months ago, both bond and prediction markets saw Kevin Hassett as the likeliest candidate for next chair of the Federal Reserve. As of today, Rick Rieder is the favourite.
Anyone seeking to take measure of Rieder has a lot of material to work with. In his capacity as chief investment officer for fixed income at BlackRock, Rieder has written and spoken at great length about interest rates, the economy, markets and the Fed. You can start with Unhedged’s interview with him, from two years ago, here.
Trump has met with Rieder and spoken warmly of him, a sure indication Rieder is comfortable with a lower fed funds rate. Here is Rieder calling on the Fed to lower rates in July, when the policy rate was at 4.25 per cent:
If you look at the housing market, particularly . . . the people that borrow today [that] are lower income — they’re adversely affected by where these rates are. If we get the rate down, you can actually bring home prices down, you build more houses, you’ll actually reduce inflation. I think it’s quite consistent to bring the interest rate down, even though the economy is operating at a pretty good level. Where we’re going is to a lower level of inflation . . . think about inflation break-evens today . . . the funds rate, even if you bring it down to 3.25, you’re still above the rate of inflation.
Inflation, Rieder argued in his outlook for 2026, is no longer the central problem for the US economy. It’s the labour market. Job creation has been mostly sustained by the healthcare sector, and wage growth is slowing:
Taken together, this is why we’ve been arguing that the Fed’s challenge in 2026 is no longer about taming inflation — it’s about avoiding unnecessary damage to the parts of the economy that are already under pressure. With the inflation storm largely behind us and labour potholes ahead, we reiterate the need to move away from restrictive policy toward a more balanced stance.
Even more strikingly, a few months ago in a discussion over how high rates hurt small business, the housing market and lower-income consumers, Rieder said the following:
The US government, 90 per cent of what they finance in Treasuries, is two years [maturity] and in. You keep the interest rate 100 [basis] points above where it should be, and that costs the country $100bn per annum . . . we gotta keep rolling immense amounts of [short-term] debt — that is still the tail risk today. Having gone through too many crises in my life, from the housing crisis, to emerging market crises, the European crisis, financial crisis, it all centres around where the vulnerabilities are and that’s the debt . . . today it’s at the US government . . . if you keep nominal GDP over the cost of the debt, meaning we get the cost of the debt down a bit, get GDP [up], we’ll actually de-lever the economy.
This sounds a bit like Rieder might think that the Fed should help the Treasury manage the national debt by keeping rates low. There are plenty of people who think that the central bank does this already, for example with quantitative easing. But it is not part of the Fed’s mandate, and if a chair were to make such a suggestion out loud, people would freak out. Trump, on the other hand, would love the idea.
Will Rieder give Trump the big rate cuts he wants, then? Rieder may be a big dove, but he is an enormously accomplished person — arguably the most important bond investor in the world. Unlike many Trump appointees, he would be incurring very high opportunity costs to take a job in government, and seems unlikely to pay them just to become Trump’s stooge. His stature might make it less likely that he is ultimately selected, but for now, his presence at the top of the list of candidates is reassuring markets. Steven Englander at Standard Chartered believes picking Rieder (or Christopher Waller, or Scott Bessent) would all mean less worries on Fed independence, lower risk premia, dollar support, and maybe even lower yields.
Unhedged is not so sure. Rieder’s comments about lower rates pushing inflation down, and about Fed policy and the debt, make us a bit nervous. Inflation risk is not to be waved away.
(Kim and Armstrong)
Readers respond on gold
Yesterday’s gold piece received a lot of responses. The spread of opinion ran from “it’s a bubble, duh” to “the world is on fire, you idiot, buy gold”. Some points stand out:
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Edward Finley of Arrow Wealth Advisory wrote to point out that the mix of returns and diversification is gold’s key feature. “Gold’s historic return has been decent (averaging 7.3 per cent from 1997 to 2024) but more importantly, has nearly no correlation or beta (each 6 per cent) to US large cap equities . . . that sounds like something retail investors like, sure, but it also sounds like something [financial] advisors like.”
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Sahil Mahtani of Ninety One asset management wrote to note that gold is still a very small part of most institutional portfolios, a point he makes amusingly here.
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Several readers noted that the gold market is tiny, in both total size and trading volume, relative to the equity and bond markets. So small reallocations towards gold should be expected to have a big effect on the price.
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Michael Howell of CrossBorder Capital argued that the debasement view was wrong, and the real source of marginal gold demand is China. He writes: “In the past year the PBoC has injected around US$1.1 trillion into Chinese money markets: we suspect China will be forced to inject a similar amount this year in order to begin to address her overwhelming debt burden.” This money finds its way into the real economy, where the key liquidity sink is gold. Total gold demand in China is not easy to estimate, but one market participant told me recently that institutional demand in China has been very strong recently.
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Lots of people wrote to say that, yes, the world is even scarier than in 2001 or the 1970’s, so gold’s run makes sense (see today’s good read for one articulation of that case).
(Armstrong)
One good read
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