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Your guide to what Trump’s second term means for Washington, business and the world
Gauges of the market mood typically pick a point between fear and greed. What we have now is not quite either of those. It is a universe where muddling through and imminent disaster exist side by side at all times and investors have no clue which way to jump. It’s exhausting and infuriating, it litters markets with opportunities to lose money, and it’s here to stay.
“He’s behind you! Oh no he isn’t!” as the analysts at Rabobank rather deftly put it this week. No prizes for guessing the identity of the pantomime villain here, of course. It’s Donald Trump, whose rethinks on high-stakes economic policy are almost too speedy and too numerous to count.
To take one of the biggies, just over a week ago the US president declared on his Truth Social platform that the “termination” of “too slow” Federal Reserve chair Jay Powell could not come fast enough — a grotesque and reckless assault on the most important position in global finance. Later, a reporter asked Trump if he was trying to remove Powell from office. “Yeah,” he replied. “If I want him out, he’ll be out of there real fast. Believe me.”
Set aside for a moment that this is, right now, not true. Trump cannot defenestrate Powell before his time is up a year from now, unless and until the administration can find a legal loophole. In any case, now we are suddenly encouraged not to worry. By Tuesday, Trump was telling reporters he had “no intention” of firing the Fed chief, as if the idea had never occurred to him. (“We have always been at war with Eastasia” springs to mind.)
So, no harm done, right? Not quite. For one thing, the cat is out of the bag. The Fed’s independence has been undermined. We now know with even more certainty than before that Trump wants a Fed chair who will cut interest rates in an effort to fix the economic mess he is making, even despite the risk that inflation bubbles up again.
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In addition, this whole sorry tale introduced a completely pointless and unnecessary bout of volatility to already jittery markets. This is how market accidents happen. The broadside against the Fed first gave investors the heebeejeebies, making a bad run for the dollar, stocks and US government bonds even worse. The climbdown had the opposite effect, with stocks and the dollar picking up.
This is, of course, not the only sphere in which the signals from Trump and his administration are far from clear. Just in the past few days, markets jumped after Treasury secretary Scott Bessent said the trade war with China was “unsustainable” — a hint that progress towards de-escalation was at hand. But Chinese officials later said no negotiations were taking place at all. Again, this is all goosing markets higher and lower without any certainty that anything has changed. Hedge fund and trading big cheese Ken Griffin put it well this week when he remarked that tariff talks have entered a “nonsensical place”.
The nonsense is not all bad for everyone. Trading firms, including big investment banks and Griffin’s Citadel Securities, stand to gain from hefty trading volumes, whatever the overall direction. Hedge funds are at least trying to enjoy the ride.
But fund managers with longer time horizons tell me their nerves are shot. The only way to cope is to try to be nimble, and not to overreact to anything, positive or negative. The constant headline-driven market movements suggest this effort at serenity is not going well. Burn-out risk for the professionals here is real.
To try to alleviate the mood, let’s focus on the positives. In particular, it seems markets do impose a little discipline on the US president after all. It is hard to believe it is a coincidence that Trump paused his “reciprocal” tariffs shortly after an auction of three-year US government debt proved to be a dud — a buyers’ strike, as some market watchers put it, by foreign investors. Similarly, it appears the president learnt quickly that if you turn up the heat on the Fed, investors head for the exit. He denies it, but investors know: he blinked, and blinked again.
Still, investors who seize on every positive-ish headline are playing a very strange game. It is not “good” news that the president is holding back from trying to oust Powell right now. It is the absolute minimum that any investor holding US assets should be able to expect. Similarly, global tariffs are still high by any sensible measure, and much higher than investors had expected, despite the step back. A US recession is a serious risk, and the ability of the Fed to respond is rather limited.
It is important to remember that a president prone to changing his mind in a positive direction can do the opposite again at the drop of a hat. “The president has retreated in battle but he could go on the front foot again!” as Mark Dowding at BlueBay Asset Management put it.
The point of greatest danger to investors may well be when markets are relatively calm, calm enough to encourage the president to believe he can push the boundaries yet again. Fund managers will have no rest for as long as he is in office. Just around 1,360 days of this left, everyone.