Key Talking Points

• The Federal Reserve (Fed) — ironically, our country’s third attempt at central banking — has a representative nature to it, desirous in protecting investors from politicized policy-making.
• We shouldn’t be surprised that the executive branch is lobbying for lower rates. That’s been the case during various administrations from Reagan to Obama. 
• The Committee, which sets interest rate policy, consists of 12 members, including presidents from five different district banks. The Chair only has one vote.
• There is no reason to aggressively cut rates down to one or two percent when inflation is above the Fed’s target, unemployment is low, and the economy is still growing.
• That said, the Fed has some room to shave off a few quarter points by the end of the year if inflation stabilizes.
• We define “Fed Independence” as the ability to pursue their congressional mandate (full employment and stable prices) without outsider influence.

Third Time’s a Charm

Broadly speaking, Congress created the Federal Reserve System in 1913 as a third attempt to unify the banking and payments system across the country. Both the first Bank of the United States and the second “Bank of the United States” lasted roughly 20 years, and then for over 70 years, the country had an era of free banking when state-chartered banks issued their own currency.

This third attempt at central banking is uniquely and dare we say, proudly American. This system includes a Federal Reserve Board of Governors and 12 District Banks. Representation is embedded into the system through the design and procedures of the rate-setting Federal Open Market Committee. The Committee consists of governors who are confirmed by Congress and rotating District Bank Presidents who represent all regions of the country.

Independent. Really?

For the sake of discussion, we define “independence” as the privilege to pursue the congressional mandate of full employment and stable prices without outsider influence.

The reason to narrowly define the term this way is because in an integrated international economy, central bankers should consider the interconnectedness with fiscal policy, global economic factors, and broader capital market stability. To wit, good central banking is not operated in a vacuum or independent of outside considerations, yet still considered independent of political pressure if able to perform duties without fear of getting fired without cause.

With Privilege Comes Responsibility

Yes, it’s true — our fed funds rate is higher than several other central banks, including the European Central Bank. But with privilege comes responsibility. The exceptional nature of our economy, the depth of our capital markets, and the safety of our legal structure often warrant a policy rate above international rates.

U.S. Policy Rate Highest Among G-10

Source: LPL Research, European Central Bank, Federal Reserve Board, 07/21/25

A data dependent Fed that is not influenced by political pressures is critical. There is no reason to cut rates aggressively down to one or two percent when inflation is above the Fed’s target, unemployment is low, and the economy is still growing. Longer duration yields would spike and the dollar would weaken if the Fed were perceived as a political pawn, so reiterating data dependency is the prudent action right now. The Fed has some room to shave a few quarter points off its target rate by the end of the year, but the data does not support a dramatic downward move in rates.

Summary

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities. LPL Research advises against increasing portfolio risk beyond benchmark targets currently, as the market seems to be factoring in a lot of positive news. Investors may be well served by bracing for occasional bouts of volatility until trade uncertainties are resolved. LPL Research continues to monitor tariff negotiations, economic data, earnings, the bond market, and various technical indicators to identify a potentially more attractive entry point to add equities on weakness.

During periods of policy uncertainty, LPL Research prefers to stray little from its benchmarks. In that spirit, the Committee recently upgraded emerging market (EM) equities to neutral, leaving regional preferences across the U.S, developed international, and EM aligned with benchmarks. The Committee still favors growth over value, large caps over small caps, and the communication services and financials sectors.

Within fixed income, the STAAC holds a neutral weight in core bonds, with a slight preference for mortgage-backed securities (MBS) over investment-grade corporates. The Committee believes the risk-reward for core bond sectors (U.S. Treasury, agency MBS, investment-grade corporates) is more attractive than plus sectors. The Committee does not believe adding duration (interest rate sensitivity) at current levels is attractive and remains neutral relative to benchmarks. The Committee would get more interested in adding long-term bonds if the U.S. 10-Year Treasury yield got closer to 5%.