Introduction to the Trump-Powell Feud
President Donald Trump has been clear about his desire for lower interest rates, and he’s been applying pressure on Jerome Powell, the Federal Reserve Chair, to make it happen. This has led to a years-long feud between the two, with Trump publicly criticizing Powell and even threatening his position. The tension between them has been escalating, with Trump recently considering announcing a new Fed Chair as early as this fall, ahead of Powell’s term ending in May.
Potential Market Reactions
If Trump decides to announce a new Fed Chair early, it could have significant effects on the market. According to José Torres, a senior economist at Interactive Brokers, the stock market could immediately rally if Trump appoints a new Fed Chair who is keen on lowering interest rates. This is because lower interest rates can boost sectors like real estate, industrials, and technology stocks.
Inflation Expectations
However, Peter Berezin, the chief market strategist at BCA Research, notes that lowering interest rates prematurely could lead to inflation rising. This is a concern for investors, who are waiting to see the full impact of tariffs on inflation and economic growth. The five-year inflation average expected five years from now has been trending higher in recent months, reaching 2.27% on June 30.
Bond Yields
Berezin also warns that bond investors could stage a sell-off if they don’t trust the new Fed Chair to take inflation seriously. This could lead to higher long-term inflation expectations, causing bond yields to spike. This would be the opposite of what the Trump administration has been wanting, which is lower interest rates.
The Path Forward
The path for interest-rate cuts largely depends on incoming inflation data and how the Fed responds. Trump bringing in a favored Fed Chair is unlikely to sway the trajectory of rate cuts significantly, as FOMC members need to come to a consensus before deciding to change the interest rate level. Torres notes that there’s a possibility Trump could continue feuding with the new Fed Chair on rates if inflation data continues to come in hot.
Conclusion
In conclusion, the feud between Trump and Powell has significant implications for the market and the economy. While a new Fed Chair could lead to lower interest rates and a stock market rally, it also poses the risk of inflation rising and bond yields spiking. Ultimately, the path forward will depend on a variety of factors, including inflation data and the Fed’s response. As the situation continues to unfold, investors and economists will be watching closely to see how it all plays out.
