A former Clinton advisor, James Carville, once famously quipped, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back to the bond market. You can intimidate everybody.”
As financial markets attempt to recover from weeks of turbulence, a high-stakes confrontation is brewing between President Donald Trump and Federal Reserve Chair Jerome Powell. At the center of this conflict lies a fundamental disagreement over interest rates, with global economic stability hanging in the balance.
Trump’s Drive for Lower Rates
President Trump has never hidden his preference for low interest rates. His desire for cheaper borrowing costs has been a consistent theme throughout his presidency, and in recent weeks, he has been explicit in his demands. Earlier this month, as markets reeled from his tariff announcements, Trump posted on Truth Social: “This would be a PERFECT time for Fed Chairman Jerome Powell to cut interest rates. He is always ‘late,’ but he could now change his image, and quickly.”
The President’s public criticism has reached new heights, with Trump openly declaring that Powell’s “termination cannot come fast enough” and telling reporters, “If I want him out, he’ll be out of there real fast.” His frustration stems from Powell’s reluctance to cut interest rates amid the administration’s sweeping tariffs.
Powell Throws Cold Water on Rate Cuts
Powell’s April 16 speech at the Economic Club of Chicago effectively poured cold water on any hopes for imminent rate cuts, directly contradicting Trump’s demands and igniting the president’s fury. In a carefully worded but unmistakable message, Powell emphasized that the Fed would remain in a wait-and-see mode, delivering what market strategist David Russell described as “a clear warning about stagflation and a declaration that the Fed won’t enable the White House with rate cuts.”
During his address, Powell stressed the central bank’s obligation to “keep longer-term inflation expectations well-anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” He also pointedly remarked that Fed independence was “a matter of law” that could only be altered by Congress, drawing applause for his pledge to set monetary policy “without consideration of political or any other extraneous factors.”
In what many viewed as a direct challenge to Trump’s economic narrative, Powell bluntly stated that the president’s tariffs would likely lead to higher unemployment as the economy slows and that inflation would “in all likelihood” increase as well. He specifically contradicted Trump’s repeated claim that foreign countries pay tariffs, noting instead that “a portion of the burden of tariffs is going to be paid by the public.”
The day after Powell’s speech, Trump posted on Truth Social calling for Powell’s termination, writing: “The ECB is expected to cut interest rates for the 7th time, and yet, ‘Too Late’ Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!'”
The Tariff Strategy: A Plan That Backfired
What many market observers are beginning to see is that Trump’s tariff strategy may have been partially designed to force the Fed’s hand on interest rates. By creating economic uncertainty through aggressive trade policies, the administration appeared to be trying to build a case for monetary easing.
Initially, Trump’s plan seemed to be working. The yield on the 10-year Treasury fell below 4% immediately after the tariff announcements as investors anticipated rate cuts to offset economic damage from trade wars. Seema Shah, chief global strategist at Principal Asset Management, noted that “low financing costs appear to be a key pillar of the Trump administration’s overall agenda.”
But instead of the lower interest rates Trump desired, the plan backfired spectacularly. Yields on the 10-year Treasury soared, reaching 4.59%—the highest since February. This significant jump in yields occurred despite growing recession fears, which would normally drive investors toward bonds as a safe haven.
China’s Countermove: The Bond Market Trump Card
What the administration may not have anticipated was China’s willingness to use its considerable holdings of U.S. Treasury bonds as leverage in the trade dispute. As the second-largest foreign holder of U.S. government debt, China wields significant influence over U.S. interest rates.
Chen Zhao, chief global strategist at Alpine Macro, stated bluntly: “I think China is actually weaponizing the Treasury holding already. They sell U.S. Treasurys and convert the proceeds into Euros or German bunds. That’s actually very consistent with what happened over the last couple of weeks.”
This assessment appears to be backed by market data. As Ken Egan, senior director for sovereigns at KBRA, told CNBC, “One factor people are speculating about on Treasurys is around the ongoing theme of a move away from the U.S. dollar, of it becoming less trusted.” He added that structural holders of debt, like Chinese reserve managers, could be moving away from Treasuries in response to U.S. policy moves.
For China, the strategic calculation is complex. While selling Treasuries puts upward pressure on U.S. interest rates and creates economic pain for America, it’s not without risk for Beijing. As Michael Brown from Pepperstone pointed out, “China selling down Treasury holdings would effectively be shooting themselves in the foot,” since it would drive down the value of their remaining bonds and potentially strengthen the yuan at a time when China wants a weaker currency to stimulate exports.
This suggests that China is carefully calibrating its Treasury sales—enough to send a message and influence U.S. policy, but not so much as to cause significant self-harm. The strategy appears to be working. Treasury Secretary Bessent acknowledged the potential threat, noting that if “a foreign rival were weaponizing the U.S. government bond market,” the Treasury would coordinate with the Federal Reserve to counter such moves.
The Bond Market Forces Trump’s Hand
The bond market’s rebellion proved so powerful that it forced a hasty recalibration of Trump’s tariff strategy. Just one week after announcing sweeping tariffs, the President paused most of them for 90 days while maintaining and even increasing duties on China.
As economist Paul Ashworth of Capital Economics noted, “Although President Donald Trump was able to resist the stock market selloff, once the bond market began to weaken, too, it was only a matter of time before he folded on his eye-wateringly high tariffs.”
While Treasury Secretary Scott Bessent insisted the tariff pause was the plan all along, Kevin Hassett, director of Trump’s National Economic Council, was more candid: “The fact that the bond market was telling us, ‘Hey, it’s probably time to move,’ certainly would have contributed at least a little bit to that thinking.”
Powell’s Stagflation Dilemma
The Fed now faces what economists call a “stagflation” dilemma: “While a sagging economy calls for Powell to cut interest rates, rising inflation suggests he should raise them,” as The Washington Post noted. This puts Powell in the impossible position of having to choose between his dual mandates of price stability and maximum employment.
Some division is already emerging within the Fed’s interest rate-setting committee. Governor Christopher Waller expects the tariffs’ impact to be temporary but acknowledges they could weigh on the economy and potentially trigger a recession. Meanwhile, Minneapolis Fed President Neel Kashkari appears more focused on fighting inflation effects from higher tariffs, suggesting reluctance to support rate cuts soon.
Some analysts believe Trump’s critique of Powell is creating a scapegoat in case his trade war strategy fails. Wall Street trader Peter Tuchman told CNN, “If things continue to go down and a deal is not made, he’s going to blame the downturn in the market on Jay Powell and say that it was because he didn’t cut the rates.”
The Endgame: Several Possible Outcomes
As this high-stakes financial chess match continues, several outcomes are possible:
- Trump could intensify pressure on Powell, potentially through legal challenges to the Fed’s independence or by appointing a “shadow” Fed chair to undermine Powell’s authority.
- Powell could capitulate to political pressure and cut rates despite inflation concerns, risking his credibility and the Fed’s independence.
- China could increase or decrease its Treasury sales based on progress in trade negotiations, effectively using the bond market as a bargaining chip.
- The bond market itself—often referred to as “bond vigilantes”—could continue to discipline both sides, forcing compromises from both the White House and the Fed.
For now, Trump and Powell remain locked in their confrontation, with global markets watching nervously. The danger, as CNN noted, is that “if Trump were to acquire the power to manipulate interest rates at will—through a proxy Fed chair or otherwise—he’d spark confusion in the financial markets, buckle confidence in the US economy, and almost certainly spike inflation.”
What’s becoming increasingly clear is that in this modern financial landscape, the bond market may ultimately be more powerful than either the president or the Federal Reserve. China’s willingness to use its Treasury holdings strategically has added yet another layer of complexity to an already volatile situation.
In this financial drama between Trump, Powell, and China, that observation has never seemed more prescient.
Summary TLDR:
The stock market will remain extremely volatile until some type of clarity appears. Until then, cash is king. And don’t forget, I TOLD YOU SO.
The opinions expressed in this article are those of the author and do not reflect official policy positions of any government agency or financial institution.