One of the biggest financial themes this year, at least since the presidential inauguration towards the end of January, has been Donald Trump’s relentless attack on the US Federal Reserve.
The Trump administration’s tariff strategy, such as it is, has certainly moved markets.
But, with all the major US stock indices and many other global ones trading around all-time highs, it’s apparent that most investors don’t see the imposition of levies on US imports as a barrier to rising equity prices.
Perhaps this shouldn’t be a surprise.
The swingeing ‘reciprocal’ tariffs announced in early April have, in most cases, been reduced from their original levels.
And many deadlines have been extended as trade talks continue, with China’s deadline now pushed out to November.
That’s not to say there aren’t serious concerns, particularly as deals have yet to be struck with two of the US’s largest trading partners, Canada and Mexico.
But tariffs are now on the back burner as far as investors are concerned.
This is despite the fact that the Federal Reserve continues to insist that uncertainty over the possible inflationary effects of tariffs has prevented it from loosening monetary policy further.
Of course, President Trump doesn’t see it this way. Instead, he sees the Fed, and in particular its Chair, Jerome Powell, as politically motivated.
After all, this time last year, and crucially just a few months before the Presidential Election in November, the central bank was expected to cut rates for the first time since March 2020.
But rather than going with 25 basis points, the Fed suddenly pivoted to a mammoth 50 basis point cut, following it up with two further 25 basis point cuts in November and December.
And while the December cut took place after Mr Trump’s decisive win, the other two didn’t.
Coincidence? Not to President Trump, particularly as since then the Fed has kept the Fed Funds rate at 4.25-4.50%.
All that looks set to change. This blog was written just a few hours before the US Federal Reserve announced its latest rate decision.
According to the CME’s FedWatch Tool, the probability of a 25 basis point rate cut later tonight hovers around 96%.
That’s pretty much conclusive. But that won’t satisfy President Trump.
In fact, it’s likely to unleash a fresh torrent of abuse on Mr Powell, along with other rate setting members of the Federal Open Market Committee (FOMC).
Ahead of the meeting, the Trump administration managed to get Stephen Miran, its preferred candidate, approved by the Senate as a new Fed governor.
Mr Miran replaces Adriana Kruger, who resigned suddenly in early August.
But the administration was unable to unseat Governor Lisa Cook, who continues to battle allegations of mortgage fraud.
Despite this, President Trump continues to work to replace existing governors with his own favourites.
He has also made it clear that he wants rid of Jerome Powell, and to that end, he’s prepared to nominate his own choice for Chair as early as this month, well before Mr Powell’s term ends in May next year
All this threatens the Fed’s independence, or perhaps it’s more accurate to say ‘apparent independence’.
Because even though we all pretend that the Fed stands above politics, that’s not really the case, and probably never has been.
But perception is everything, and as Mr Trump makes no secret of what he’s up to, it leaves a bad taste in the mouth.
It also has the potential to be highly disruptive for capital markets.
Looking at a chart of the S&P 500, the index has been steadily grinding higher since May.
This was after it recovered most of its losses following President Trump’s reciprocal tariffs announcement on 2nd April.
But since May, the daily MACD has drifted lower, setting up a long period of negative divergence.
This can often signal that a change in market direction is coming, as the current MACD indicates declining upside momentum even as prices hit a succession of record highs.
The MACD has curled up a touch recently as both investors and traders are in no hurry to book profits as this relentless bull market grinds on. There will be a day of reckoning — there always is.
But there’s very little fear out there, and a lot of greed. Markets have had pullbacks, but each and every one has been seen as an opportunity to ‘buy the dip’ and add exposure.
It feels as if it would take something quite drastic to shift this market away from its current bullish narrative.
Could tonight’s rate decision, or more importantly, the FOMC’s updated forecast for the Fed Funds rate for this year and beyond, prove to be the trigger?
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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