July 21, 2025 – In the 1960s, the United States government was spending heavily on international and domestic policy, funding the Vietnam War while simultaneously expanding domestic spending through President Lyndon B. Johnson’s “Great Society” programs such as Medicare, Medicaid, civil rights initiatives, and anti-poverty measures.
By the mid-1960s, the U.S. economy was facing rising inflation due to the costs of the Vietnam War and seemingly endless social program expenditures. At the time, President Johnson was reluctant to raise taxes to help fund this spending and curb inflation, fearing political backlash, which put pressure on monetary policy and the Federal Reserve. Moreover, Johnson wanted strong economic growth without the drag of higher interest rates, which would make financing government deficits more expensive and potentially slow the economy ahead of an upcoming election.
During that period, then Federal Reserve Chairman William McChesney Martin was resolute in fighting inflation, keeping the fed funds rate high to help combat inflationary pressures caused by elevated government spending and loose fiscal policy during Johnson’s presidency.
Fed Chair Martin was a career economist known for his advocacy of central bank policy. He was resolute in his belief in central bank independence, famously describing the Fed’s role as “taking away the punch bowl just as the party gets going,” to prevent economic overheating.
In 1965, Martin and the Fed raised interest rates to help cool the economy and nip inflation in the bud, a move that infuriated Johnson, who preferred low interest rates to support economic growth and fund vast social programs. According to historical accounts, Johnson summoned Martin to his Texas ranch and reportedly pushed Martin against a wall and said, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”
Consequently, Johnson’s pressure on Martin and future Fed monetary policy may have been effective. While Martin did raise rates somewhat, the pressure he faced from the President arguably delayed more aggressive policy tightening. This combination of loose monetary policy and heavy fiscal stimulus sowed the seeds a decade later for the relentless stagflation of the 1970s.
This would not be the last time a U.S President expressed his frustration with the Fed’s independence by attempting to involve himself in monetary policy.
While presidential interference in monetary policy was nearly absent in the most recent three decades, a period in which inflation averaged around 2%, this dynamic has recently shifted.
Over the past several months, the U.S. President has publicly lambasted the Fed Chair, layering insults while demanding a dramatic reduction in the fed funds rate (of as much as 300bps). Last week, rumours swirled that the President had circulated a draft memo to fire the Fed Chair, despite the Supreme Court indicating that the President cannot remove a Fed governor, including the Chairman, except for cause. This inconvenient detail has caused further drama, including the most recent episode of the Administration attempting to establish a cause to fire Powell based on expensive renovations at the Fed’s headquarters.
In any event, it looked like cooler heads prevailed, and the Fed Chair looks safe in his role, at least for now. In addition, is was reported that Treasury Secretary Scott Bessent warned the president that ousting Jerome Powell could cause chaos in the capital markets, including a plunging stock market, soaring long term interest rates, and a weakening U.S. dollar. Moreover, Powell’s term ends in May of next year, indicating that it may be easier for the Administration to be patient and install one of their favoured picks to head the Federal Reserve next spring.
Currently, the market-implied odds of Jay Powell exiting his role as Fed Chair this year stand at just 21%.
Nevertheless, a 21% probability of firing the Fed Chair or pressuring him to quit in the leading global capital market is a wild statistic. Such monetary policy interference and the removal of central bank personnel are actions that typically take place in emerging markets. For example, in 2021, Turkish President Erdogan replaced the country’s central bank governor with a loyalist who cut interest rates despite an inflation rate of 15%. Unsurprisingly, the currency plunged, and inflation skyrocketed to 85% the next year. There is a reason that central bank independence is prized by investors.
Irrespective of one’s political views, there is a straightforward, unbiased, and academically supported barometer of where the fed funds rate should be. The Taylor Rule is a quantitative monetary policy guideline that indicates how central banks should adjust interest rates. It is a formula for central banks to set short-term interest rates based on two key factors:
1. The difference between actual inflation and the central bank’s target inflation rate.
2. The difference between actual economic output (GDP) and potential output (the economy’s maximum sustainable level).
The rule aims to strike a balance between the dual objectives of controlling inflation and supporting stable economic growth.
Currently, the Taylor Rule implies that the Fed is justified in maintaining its policy rate at 4.25%-4.50%, although one could argue that the indicator supports one or two 25bps cuts.
Despite the significant amount of monetary policy uncertainty, along with substantial trade policy volatility, equity markets remain relatively complacent. In particular, the recent strength of low-quality junk stocks, which have outperformed markedly this year, should give allocators pause.
Nevertheless, given the tremendous amount of optimism and speculative activity priced into equity markets, conservative allocators may want to consider taking a hedged equity approach. To help facilitate idea generation, we highlight one top-decile stock that is forecast to outperform and one bottom-decile stock that is predicted to underperform in this month’s AlphaRank Top Stocks.
OUTPERFORM: Dundee Precious Metals Inc (TSX: DPM) a high‑performing mid‑tier gold producer actively expanding its geographic exposure. DPM shares exhibit many characteristics that an investor should look for – strong momentum, an attractive valuation, robust free cash flow, and a rewarding shareholder yield (through share buybacks and dividends). Meanwhile, gold has several tailwinds that are buoyed by the U.S. Government’s economic policies and Fed interference, which has caused global investors to flee American capital markets and the U.S. dollar, instead choosing to buy gold. In addition, the Big Beautiful Bill promises enormous budget deficits, which will lead to surging Treasury note supply and declining demand as international central banks choose gold over US Treasurys. With a bullish tailwind in a rising price of gold, along with an AlphaRank score of 99.8/100, we expect DPM shares to outperform. Disclosure: Long DPM shares in the Accelerate Absolute Return Fund (TSX:HDGE).
UNDERPERFORM: Lithium Americas Corp. (TSX: LAC) is a Canadian-based mining company focused on developing lithium projects in North America, with its flagship asset being the Thacker Pass lithium mine in northern Nevada. In contrast to gold, lithium is experiencing a painful bear market, and prices have declined by approximately 80% from their 2022 highs due to oversupply and a slowdown electric vehicle demand. LAC may be a compelling short candidate due to elevated short interest, dilution risk, financial strain from construction, regulatory and environmental uncertainty, and weak lithium market prices. With an AlphaRank score of 1.2/100, we expect the shares to underperform. Disclosure: Short LAC shares in the Accelerate Canadian Long Short Equity Fund (TSX: ATSX).
The AlphaRank Top and Bottom stock portfolios exhibited negative relative performance last month:
- In Canada, the top-ranked AlphaRank portfolio of stocks returned 5.0%, outpacing the benchmark’s 2.2% return, while the bottom-ranked portfolio of Canadian equities surged 10.7%. The long-short portfolio (top minus bottom ranked stocks) fell by -5.7%, as the bottom-ranked stocks outperformed the top-ranked securities. Over the past five years, the top decile AlphaRank portfolio has gained nearly 200%, while the bottom-ranked portfolio has risen less than 50%.
- In the U.S., the top-decile-ranked equities return 4.2%, underperforming the S&P 500’s 5.1% return. Meanwhile, the bottom-ranked stocks rallied by 8.4%, leading to a -4.2% return for the top decile minus the bottom decile long-short portfolio. Over the past five years, the top-ranked U.S. equities have gained more than 150%, while the bottom-ranked portfolio has fallen nearly -40%.
AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security, ranging from 0 (bottom-ranked) to 100 (top-ranked), based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and with a market capitalization exceeding $100 million are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.
