Weekly Comment: Trump takes aim at Fed chair Powell

Market overview – Richard Carter, Head of Fixed Interest Research

US assets have come under some pressure in recent sessions after President Donald Trump renewed attacks on Jay Powell, chair of the Federal Reserve (Fed). Trump has openly criticised Powell for not lowering interest rates and there has been some speculation that the president is considering ending Powell’s term, which is scheduled to end in May 2026, sooner. The market reaction to these attacks reveals a potential losing of confidence in US markets — like we saw following the announcement of trade tariffs, albeit on a smaller scale — with American stocks, bonds and the US dollar all declining.

Trump is seemingly pushing for an easing of monetary policy to provide additional support to offset some of the negative growth hit from trade tariffs. But rate setters are aware that not only will the tariffs lessen demand, they will also raise prices. This leaves policymakers stuck between a rock and a hard place, as higher inflation calls for higher interest rates. Satisfying both parts of the Fed’s dual mandate has become more challenging and policymakers appear to be awaiting further developments before making alterations. Recent comments from Jay Powell appear to rule out imminent Fed rate cuts, stating that rate setters believe they are well positioned to await further clarity before considering adjustments.

Fed independence is a cornerstone of the US pre-eminence in financial markets and the idea that Trump could replace Powell with a more agreeable Fed chair is causing some concern. Having said that, Trump is likely aware of the ensuing implications should central bank independence be seriously challenged and reports suggest that advisers have warned him against making a drastic move. The legal challenges associated with removing Powell would also be sizable, with significant guardrails in place to prevent it occurring. Furthermore, it is not like Powell is standalone among policymakers in his view that current conditions do not warrant lower interest rates — removing him would still leave significant opposition among Federal Open Market Committee (FOMC) members.

For now, it seems like Trump is seeking someone else to publicly blame for the weak performance of US assets in recent weeks. Given the risks and rewards it still seems unlikely that Trump would go as far as actually attempting to remove Powell, although his persistence with trade tariffs despite ominous warning signs should serve as a note of caution. It is telling that US bond yields have risen in recent weeks following the tariff announcements. After Treasury yields first fell in a flight-to-safety move, they have reversed higher, suggesting US market confidence concerns.

It is quite possible that should Trump act in a manner that brings Fed independence into serious doubt that we will see a substantial escalation in this loss of confidence, and therefore US bond yields would accelerate higher, even if the next Fed chair is intent on lowering interest rates. Trump and his advisers should be aware of this and, as the tariff pause showed, the bond market is still seemingly capable of curbing Trump’s unorthodox instincts.

Weekly economic announcements:

Last week, the MSCI All Country World Index (MSCI ACWI) gained 0.4% (-5.1% YTD).

United States:

US equities continued to underperform last week, with benchmarks falling -1.5% (-9.8% YTD). Tech stocks dropped -2.6% (-15.5%), partly due to the announcement that chip exports to China would face new restrictions and not benefit fully from an exemption. Growth shares underperformed value stocks, as small caps outperformed large caps.

Over the week, the 10-year Treasury yield fell 16 basis point to end at 4.33% (down 25 basis point YTD). The US dollar continued to decline, and a trade-weighted index is now down almost 10% for 2025.    

United Kingdom:

UK equities posted a strong return last week, rising 4.0% (2.6% YTD), to move back into positive territory for the year. Sterling hit its highest level against the US dollar since October, appreciating to US$1.33 from US$1.31. Bond markets also moved higher, with the 10-year gilt yield falling 19 basis points to 4.56%.

Headline UK inflation dropped more than expected in March to 2.6% in annual terms, down from 2.8% previously. Meanwhile the labour market weakened with a 78k drop in the number of employees in March, the most since 2020. The unemployment rate remained unchanged at 4.4%. Strong wage growth suggests that there is little slack in employment, with average earnings, excluding bonuses, rising 5.9% in annual terms for the three months through February, ticking up from 5.8% for the previous three-month period.

Europe (ex UK):

The MSCI Europe ex UK ended last week 3.7% higher (1.0% YTD), recouping some of the monthly declines. German stocks gained 4.1% (6.5% YTD), French equities added 2.5% (-1.1% YTD) and Italian bourses rallied 5.7% (5.7% YTD).

The European Central Bank (ECB) lowered interest rates for the seventh time in less than a year, taking its key deposit rate to 2.25%. The euro ended the week little changed against the US dollar, at US$1.14.

Approver: Quilter Cheviot, 22 April 2025  

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