If there’s one thing United States (US) President, Donald Trump, has mastered, it’s keeping the world guessing. His X feed, together with posts on his social media platform, Truth, in conjunction with press conferences have become must-watch events for anyone with a stake in the global economy. But it is his ongoing campaign against US Federal Reserve (Fed) Chair, Jerome Powell, where Trump is not just stirring the pot – he is threatening to upend the very system that underpins America’s economic stability.
The Fed: America’s economic firewall
Imagine the Fed as the nation’s economic firewall – an institution designed to keep the economy from overheating or freezing up, regardless of who sits in the Oval Office. For over a century, the Fed’s independence has been sacrosanct. Its job is to make tough calls on interest rates and money supply, guided by data, not by political agendas.
Why such fierce protection of its autonomy? History is littered with examples of what happens when politicians get too cozy with central bankers: runaway inflation, lost investor trust, and economic crises that take years to repair. The Fed’s credibility is its currency, and if that is spent, it will be nearly impossible to get back.
Trump vs Powell: a high-stakes showdown
Enter President Trump, who has made no secret of his frustration with Powell’s refusal to slash interest rates on command. In recent weeks, Trump’s rhetoric has escalated from public scolding to outright threats, declaring that Powell’s “termination cannot come fast enough”. For Wall Street and global investors, this isn’t just political theatre, it’s an extremely loud alarm bell.
Markets thrive on certainty, and the mere suggestion that a US president might fire the Fed Chair for policy disagreements sent shockwaves through stock markets, bond markets, and sent the dollar tumbling. Investors know that if the Fed is seen as just another tool in a US president’s toolbox, the rules of the game change overnight. The dollar’s status as the world’s reserve currency, the safety of US government bonds, and America’s reputation for economic stability all hang in the balance.
The domino effect: from Wall Street to Main Street
What would actually happen if Trump followed through and tried to oust Powell? The immediate fallout would be ugly. Expect a global selloff as investors flee US assets, fearing that monetary policy is now subject to political whims. The cost of borrowing for everyone – from the government to small businesses – would spike. The dollar could lose its lustre as the world’s safe haven, and the tsunami will be felt across every continent.
But the damage wouldn’t stop at the trading floor. If the Fed caves to political pressure and cuts rates too soon, it could unleash a wave of inflation – just as tariffs and supply chain disruptions are already pushing prices higher. The nightmare scenario? Stagflation, where Americans face both rising prices and a sluggish job market, echoing the economic malaise of the 1970s.
Even if Trump’s gambit failed – blocked by the courts or by Congress – the mere attempt would leave a scar. Investors and business leaders would be left wondering: Is the Fed truly independent, or just one tweet away from a shakeup? That kind of uncertainty is poison for long-term planning and investment.
Allies and adversaries take note
This drama isn’t playing out in a vacuum. America’s allies and rivals are watching closely. If the world’s largest economy looks willing to sacrifice central bank independence for political gain, what message does that send about the reliability of US institutions? At a time when global cooperation is already unravelling, this could push partners further away and embolden adversaries who thrive on chaos.
“America First” or “America alone”?
US Treasury Secretary, Scott Bessent, tried to calm nerves this week with a reminder that “America First does not mean America alone.” He called for deeper collaboration with trade partners and respect for global economic norms. But Bessent’s measured words stand in stark contrast to Trump’s bombastic threats, highlighting a fundamental contradiction at the heart of current policy.
The bottom line: don’t gamble with the Fed
Trump’s campaign against Powell isn’t just a headline-grabbing feud – it’s a high-stakes gamble with America’s economic future. Undermining the Fed’s independence could ignite a chain reaction of lost confidence, market chaos, and real pain for American families and businesses.
The world has learned, sometimes the hard way, that central bank independence is a pillar of prosperity. To knock it down for short-term political gain would be to risk everything that makes the US economy resilient and trusted. In the end, the message from economists, investors, and even many in Trump’s own party is clear: this is one flip-flop America – and the world – cannot afford.
MARKET OVERVIEW
Please note that the information below is based on markets as of the time of writing.
Key themes:
- US 10-year Treasuries are holding steady after three consecutive days of declines.
- US equities are in the green following robust earnings and some moderation in policy from the White House.
- Gold has retreated as Trump softens stance on Fed independence.
- The dollar has also found support from a more conciliatory White House tone on Fed leadership and potential trade war agreements.
Bonds take a breather after ongoing Trump-based selling
US Treasury yields held steady this morning, with the 10-year note holding around 4.31%. This pause follows three days of bond selling as investors digested President Trump’s latest remarks suggesting trade talks with China are ongoing – despite denials from Beijing. Progress in negotiations with Japan and South Korea also helped calm nerves. US Treasury Secretary, Scott Bessent, reinforced the need for lower tariffs to enable meaningful US-China dialogue, while Cleveland Fed President, Beth Hammack, hinted a rate cut could be considered as soon as June if the data supports it. Trump’s softer tone on Fed Chair, Jerome Powell, further stabilised yields after their recent swings.
In the United Kingdom (UK), 10-year Gilt yields have dropped toward 4.5%, extending their retreat from April highs. The Debt Management Office’s decision to cut long-dated bond issuance and the Bank of England’s (BoE’s) halt on long-Gilt sales under quantitative tightening added downward pressure. Softer inflation figures and a surprise contraction in private sector activity – partly due to US tariffs – have strengthened the case for more BoE rate cuts this year.
South Africa’s 10-year bond yield is hovering around the 11% mark after dipping to a three-week low. This reversal followed a sharper-than-expected inflation drop and the government’s decision to keep VAT at 15%, ending a political standoff over the proposed hike. However, the move raises questions about how the government will address the resulting budget shortfall, with spending cuts likely on the table.
US stocks cheer Trump walk-back, report robust earnings
US equities rallied on Thursday, trading in the green by 2.8%, driven by robust tech earnings. Alphabet surged 5% in after-hours trading after a strong quarterly report, lifting other tech giants like Nvidia, Tesla, Meta, and Amazon. The Dow, S&P 500, and Nasdaq all posted their third straight day of gains, buoyed by hopes for a potential Fed rate cut and more measured trade rhetoric from the Trump administration, these indices were up by 1.2%, 2% and 2.8% respectively.
In London, the FTSE 100 recovered to close slightly higher at 8,407, as investors balanced trade uncertainty with mixed corporate results. Industrial and mining stocks outperformed, while banks and distribution companies lagged, reflecting ongoing tariff concerns.
Germany’s DAX also advanced, marking a third consecutive gain. Strong earnings from sportswear multinational, Adidas, and global industrial technology company, Siemens, offset concerns over the government’s revised 2025 growth forecast, which now predicts stagnation amid persistent global trade tensions.
Oversupply continues to weigh on oil
Brent crude oil is trading near $67/barrel, heading for a weekly loss as oversupply fears return. The hopes for a Russia-Ukraine ceasefire and the potential for increased output from the expanded Organization of the Oil Exporting Countries, OPEC+, are weighing on prices, with Kazakhstan signalling it will not cut production at major fields. OPEC+ is set to discuss further output hikes in June, while the demand outlook remains uncertain due to unresolved US-China trade tensions. New US sanctions on Iranian energy exports have provided some support but failed to offset the broader bearish sentiment.
Gold has given back some ground, and is in the red for the week, following its recent records highs. Ongoing doubts about a US-China trade breakthrough and global economic uncertainty have fuelled safe-haven demand, bolstering the precious metal. Earlier in the week, gold hit a record high of $3,500 before retreating slightly as Trump softened his stance on Fed independence. The gold-to-silver ratio remains at multi-decade highs, underscoring gold’s strong outperformance.
Dollar Index finds reprieve in White House tone
The US Dollar Index has rebounded above 99.5, recovering from earlier losses as Trump reiterated that trade talks with China and progress with Japan and South Korea are ongoing. The dollar also found support from a more conciliatory White House tone on Fed leadership, though dovish Fed commentary briefly pressured the currency.
The euro is trading just below $1.15/€, buoyed by expectations of further European Central Bank (ECB) rate cuts after the ECB lowered its deposit rate to 2.25%. The euro has gained over 5% against the dollar in April, as investors look for alternatives amid US policy uncertainty.
Sterling has climbed above $1.33/£, a seven-month high, on the back of a weaker dollar and softer UK inflation, which has increased the likelihood of BoE rate cuts.
In South Africa, the rand strengthened toward R18.80/$, as the dollar rebounded sharply. Investors also digested the scrapped VAT hike, easing coalition tensions and supporting expectations for a rate cut as inflation hit a five-year low.
Please note that due to the number of public holidays next week, we will not be publishing the Weekly Wrap.
Key indicators:
USD/ZAR: 18.81
EUR/ZAR: 21.35
GBP/ZAR: 25.02
GOLD: $3,300
BRENT CRUDE: $66
Sources: Bloomberg, Reuters/LSEG Workspace and Trading Economics.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.