Markets Weekly: Trump-Fed Feud Masks a Shift in Economics Reality

The battle lines were drawn quickly. Following the Federal Reserve’s decision to hold interest rates steady at their most recent policy meeting, Donald Trump took to his social media platform, Truth Social, to voice his displeasure, not just with the decision itself, but with the very institution in charge of it:

Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing.

Fed Chair Jerome Powell responded with his trademark restraint:

The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals.

This exchange, while politically charged, obscures an economics reality. As the Financial Times’ Robert Armstrong observed, “Monetary policy has become less important as we inch closer to the inflation target.” The Fed’s tools — interest rate adjustments and bond buying — are losing their potency in an era defined by supply shocks, trade wars, and fiscal brinksmanship.

Indeed, the Fed's recent actions, and their inherent limitations, have been under increased scrutiny, as is its tendency to overreact to incoming data. Mohamed A. El-Erian, former CEO of PIMCO, recently pointed out that:

In successive meetings over just the last six months, the Fed has refrained from cutting (July), implemented a “jumbo cut” of half a percentage point (September), shifted to cutting by a quarter percentage point and signaled a no-drama path of similar cuts to come (October), and cut but U-turned on its policy guidance (December). This week, it will pause its cutting cycle. This stop-go pattern reflects the highly reactive approach associated with the central bank’s excessive data dependency.

Such a pattern, El-Erian argues, suggests a central bank that is less in control of the economic narrative, and instead overly reliant on economic data that is often backward-looking, causing an overreaction that ultimately leads to instability. It's a reflection of the limits of monetary policy to deal with the new realities of the economy.

While the Fed hesitates, the new administration is already taking actions that are likely to impact the economic outlook in a way that may overshadow the effects of monetary policy, particularly when it comes to new tariffs. This has already played out in the bond markets, according to Bloomberg’s Jonathan Levin:

The floor that bond markets have put under Treasury yields, mortgage rates and other key borrowing costs for consumers and businesses has a lot to do with the looming uncertainty around whether Trump will institute large new tariffs and drive up prices.

This also suggests that the administration, not the Fed, may be in control of the path of interest rates

Trump should recognize that he doesn’t need to browbeat policymakers. He may well have a path to lower borrowing costs simply by ending his multi-front trade war — or at least deferring it to a time when inflation risks have disappeared.

Where does that leave us? While Trump-Fed feud makes for gripping theater, the real plot lies elsewhere. As fiscal policies dominate, the Fed risks becoming bystanders to a new era of state-driven economics — one where tariffs, not rates, call the shots.

Quick Hits

• Equities: despite the emergence of DeepSeek, Bridgewater and UBS remain bullish on AI sector.
• Fixed Income: UK regulators easing retail investor access to corporate bond market.
• Gold: Gold surges past $2800 on tariff amid concerns of US tariff threats.
• Central Bank: Core inflation in Japan's capital hits 1-year high, backing more BOJ rate hikes.
• Tariffs: Trump set to impose 25% tariffs on Canadian and Mexican imports this weekend.

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