Markets Decline as Trump Targets Fed Chair Powell

US stock indices fell on Monday, 21 April, after President Donald Trump lashed out again at Fed Chair Jerome Powell for not cutting interest rates.

The S&P 500 (ES) dropped 2.4%, while the Dow Jones (YM) and the tech-heavy Nasdaq (NQ) each tumbled 2.5%. The US Dollar (DX) fell to $97.92, lowest since March 2022, and gold (XAU) extended to new record highs at above $3,500/t oz.

Coupled with escalating tensions between the US and China, investors are also losing confidence in trade. Nonetheless, some analysts remain positive on US equities.

Why did the Markets Fall on Monday?

In a rare combination of market declines seen in stocks, the US dollar, and long-dated US Treasury yields, Monday saw a substantial selloff as Trump continued to ramp up rhetoric to fire Powell for being too slow to cut rates. On the one hand, the short end of the yield curve signalled earlier rate cuts, but on the other hand, the longer end indicated fears of inflation. Notably, Trump took a harder stance on Powell, calling him a “major loser” after the central bank head discussed the impact of tariffs on inflation and the labour market.

Despite it remaining unclear whether Trump can fire Powell, some analysts believe the damage has already been done to the US' credibility, as the monetary system will likely face political influence for the remainder of Trump’s term. The Fed faced such pressure before the 1970s; however, the past 40 years have shown that financial stability stems from Fed independence. 

In fact, the real threat of additional declines in equity markets (and not alone) and the potential loss of the dollar’s reserve status stem from the undermining of the Fed’s independence, which puts the entire global financial system at risk. Analysts warned of a massive sell-off in US-based assets, regardless of whether they are considered a safe haven, such as Treasuries, if Fed Chair Powell were to be fired. 

Where the Fed Stands After Trump’s Threats?

Trump’s rhetoric has intensified as several central bank officials have expressed concerns that tariffs have increased inflation expectations and uncertainty, prompting the Fed to adopt a more cautious approach to cutting rates. “Our dual-mandate goals are in tension,” said Powell last Wednesday, pointing to the risk of stagflation stemming from the White House's trade policies. 

Chicago Fed President Austan Goolsbee recently stated that, in the short term, expectations of inflation are higher, but in the long term, they are not increasing. He added that despite the challenges the Fed faces, it will be very hard for the bank to fail on both mandates and reiterated that a wait-and-see approach is required to evaluate the impact on the supply chain. Goolsbee argued that Fed independence is important and showed support for the Fed Chair.

Trump still appears determined to test the law about firing the central bank's head, which is only applicable for “cause.” Some say that the Fed’s mishandling of inflation and hiking too late in the aftermath of the pandemic could qualify. However, some argue that Trump would have to fire the entire FOMC, as there is consensus among them against lowering interest rates. This could trigger a “disastrous” reaction.

What to Watch Going Forward

Despite markets falling on Monday and being expected to remain under pressure if uncertainty takes a toll, Oppenheimer analyst John Stoltzfus still considers this a pullback during a bull market. The strategist believes the Fed has been successful in lowering inflation, growing the labour market, and boosting S&P 500 earnings. However, US Bank strategist Robert Haworth expects challenges in corporate earnings, which are already evident during this earnings season. (Source: CNBC)

Recent data from LSEG Lipper showed around $10.5 billion in equity fund outflows in the week to 16th April, and since then, Trump’s attempts to remove Powell have only intensified. European equity funds have seen inflows of $11 billion, with Trump stating that the US will strike a deal with the EU after meeting Italy’s Prime Minister Giorgia Meloni in Washington last week. However, the trade escalation between the US and China has now led China to warn of retaliation against countries looking to strike a deal with the US, adding an extra layer of uncertainty.

Conclusion

The Monday selloff can be largely attributed to Trump's criticisms of Fed Chair Jerome Powell and, to some extent, growing trade tensions. However, the potential for political influence over the Fed has raised concerns among investors about the credibility and independence of the central bank, which could have implications for global financial stability. 

Some analysts still maintain a bullish outlook on US equities, calling the downturn a temporary pullback. However, the environment requires careful monitoring of market conditions, US-Sino trade negotiations, and Fed communications.

*Past performance does not guarantee future results