The Trump-Powell Feud 2.0
It’s no secret that the Trump administration is pushing the Fed for lower interest rates, as lower rates typically stimulate the economy. They are also correlated to a few economic impacts, including increased consumer spending and an improved housing market.Perhaps more important to the administration, lower rates mean lower debt servicing costs for the U.S. government. The U.S. debt currently stands at $36 trillion dollars.
Approximately $9.2 trillion of that debt will mature in 2025 and ostensibly will have to be refinanced. The average rate of that debt is 3.347%, according a report by the Joint Congressional Economic Committee. Any potential refinancing will most likely be a combination of shorter-term bonds (Treasury bills and notes) and longer-term Treasury bonds.
The following chart illustrates the cost of current outstanding U.S. debt obligations by security type.
The Treasury’s challenge is that all current yields across the U.S. Treasury curve are higher than 3.347%, which means refinancing costs of U.S. debt will almost certainly be higher. For context, the 1-month Treasury yields 4.30%, the 2-year Treasury 3.80% and the 10-year 4.28% as of Friday morning.
This is where President Trump and Chair Powell are at odds. The Federal Reserve has massive influence over short-term rates through its regulation of the federal funds rate, which serves as the benchmark for most short-term lending and is the rate banks charge each other for overnight lending. A lower fed funds rate, all things equal, would result in lower short-term Treasury and refinancing rates.
President Trump has been pressuring Powell to lower short-term rates since the election, in part to help lower refinancing charges on maturing Treasuries. As we wrote in last week’s Investment Insights, Powell has indicated that he and the Fed are in no rush to cut rates and are comfortable with a “wait and see” approach to gauge the economic impacts of Trump’s tariff policies.
Late last week, those pressures hit a peak when White House economic advisor Kevin Hassett said the White House was “continuing to study” if they could fire Powell before his term ends May 2026.
In response, the global market sold off Monday, with both the S&P 500 and Nasdaq down more than 2%, the U.S. dollar weakening and U.S. Treasury yields moving higher.
On Tuesday, President Trump walked back those claims, stating, “I would like to see him be a little more active in terms of his idea to lower interest rates…but, no, I have intention to fire him (Powell).”
While this gave markets some reprieve, the Trump-Powell tension is most likely not going anywhere any time soon. What do we make of this as investors?
One, Trump’s pressure on Powell to lower rates is likely here to stay. The President and the members of his economic team have repeatedly stated their preference for lower rates sooner rather than later. However, the market will acknowledge the difference between pressuring for lower rates and the outright threats of the Fed chair’s removal. The former is palatable; the latter is reckless. A forced removal of Powell and/or a renewal of threats to the Fed’s independence will add more chaos to already fragile global markets.
Two, there’s long history of presidents criticizing and attempting to influence Fed chairmen. Presidents Herbert Hoover, Harry Truman, Lyndon Johnson and Richard Nixon have all publicly clashed with their Fed counterparts. Trump leaning on Powell to push forward his economic agenda is not without precedent, but a president removing a sitting Fed chair has never happened.
Third, we’ve seen this dance between Trump and Powell before. Powell was nominated and confirmed as Fed chairman in 2018 during Trump’s first term. Almost immediately, the two clashed over interest rates and monetary policy. In December 2018, Trump discussed his dissatisfaction with Powell and brought up the possibility of removing him. Based on that rumor, the Dow dropped 7% the week before Christmas, which was, at the time, the worst week for stocks in 10 years.
Today, we find ourselves in a similarly uncomfortable situation. On a more optimistic note, nearly seven years after Trump initially threatened to fire Powell, he remains Fed chair despite the continued criticism and dissatisfaction from the then and current president.
Our view is that Trump will not attempt to replace Powell. Not only are their significant legal hurdles that would make this difficult, but the act of a president attempting to remove a sitting Fed chair has never happened before and would likely send markets into a tailspin. Rates would rise. Stock market volatility and further weakening of the dollar would continue.
Also remember that Powell’s term ends in May 2026. Trump can simply wait Powell out. This, however, won’t prevent Trump and the administration from trying to pressure and jawbone Powell and the Fed into cutting rates over the next year.
For those of you keeping score, the next Fed meeting is May 6-7—less than two weeks away. According to fed funds futures, there’s only a 7% chance that the Fed will cut rates. Buckle up.
