Is Trump Repeating Richard Nixon's Fed Playbook? Fed Independence Fears Put Inflation-Safe ETFs In Focus

The specter of political interference in the Federal Reserve is rippling through the market, and for ETF investors, the parallels to the 1970s are becoming more and more difficult to ignore.

• What’s next for TIP stock?

While Sen. Elizabeth Warren has accused President Donald Trump of interfering in the Fed, warning that this could have serious implications for the interest rates for mortgages, credit cards and student loans, there is another, more sinister threat to the market that ETF investors should be considering: inflation risk.

Warren referenced former President Richard Nixon's term in the 1970s, an era of high inflation, unemployment and lower GDP growth.

The parallels to the 1970s and the Nixon administration are not coincidental. The fear among investors today is that the same set of economic problems that resulted in one of the most painful periods of inflation in American economic history could be about to be replayed.

The Nixon Playbook — And How It Applies To The Market Today

The Nixon administration and the economic policies that put in place during that time have a lot to teach about what could go wrong in the market today. The problem, during that time, was that the then-Fed Chairman Arthur Burns was under pressure to keep interest rates low in the run-up to an election. The end result was a period of inflation that eventually led to the stagflation crises of the 1970s.

Even hedge fund billionaire Ken Griffin has warned that tampering with the Fed is a "risky game," noting that credibility, once lost, is difficult to rebuild.

ETF Market Playbook: Positioning for Inflation Risk

If history is anything to go by, ETF investors should already be positioning for areas of the market that historically tend to perform well in periods of inflation:

• Inflation Protected Bonds: Treasury Inflation Protected Securities (TIPS) ETFs such as the iShares TIPS Bond ETF (NYSE:TIP) and Schwab U.S. TIPS ETF (NYSE:SCHP), may see increased demand as investors seek protection from inflation.
• Commodities ETFs: Commodity ETFs such as Invesco DB Commodity Index Tracking Fund (NYSE:DBC) and Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC), which are often tied to energy and other commodities, historically tend to perform well in periods of inflation.
• Energy ETFs: Energy companies, which include oil and gas producers, tend to benefit from periods of inflation. As a consequence, ETFs tracking them, such as the State Street Energy Select Sector SPDR ETF (NYSE:XLE) and Vanguard Energy Index Fund ETF (NYSE:VDE) may also reap the benefits.

The change may not occur overnight, but even the perception of politics influencing monetary policy can start to change investment allocations.

Credibility Risk Is The Real Market Trigger

The current situation is obviously nowhere near a replay of the 1970s, but the market’s sensitivity to central bank independence remains high. The current debate over Trump’s Fed policy and the investigation of Trump Fed advisor Stephen Miran has further fueled this uncertainty.

For ETF investors, the key takeaway is not politics, but positioning. If investors lose confidence in the Fed, these areas of the market, which are already positioned for inflation, can quickly go from defensive leaders to market leaders.

Photo: Jeff Faughend — Imagn Images