Long shot or not, Trump must make peace with Fed Chair Powell

US bond markets have had a minor meltdown since former President Donald Trump pulled ahead in prediction markets and then won a second term last week, putting upward pressure on mortgages and other household borrowing costs. 

If the move continues, it could be a major source of disappointment for voters who trusted Trump to improve housing affordability and the cost of living.

Fortunately, there’s a clear way for him to mitigate that damage and start his term on the right foot with bond markets: He should declare his full faith in Federal Reserve Chair Jerome Powell, whose term runs until May 2026, and pledge to hold his tongue on matters of monetary policy.

I know this is a long shot, but do hear me out.

On the back of the worst inflation in four decades, Trump’s agenda of new import tariffs and high deficits has made bond investors understandably nervous. 

Trump’s record of antagonism towards the country’s independent central bank, the key safeguard against higher prices, only makes this worse.

Also read: Trump enters just as the Fed is shifting its focus

During his first term, Trump famously berated Powell on Twitter for keeping rates too high. He has since said that he would not reappoint Powell in 2026.

Meanwhile, theories have swirled about ways that the new president could push out or try to undermine Powell before then; in an interview with Bloomberg Businessweek, Trump denied he would fire the Fed chair, but he also seemed to caveat his response: “I would let him serve [his term] out especially if I thought he was doing the right thing,” he told the publication on 25 June. 

The issue re-emerged Thursday last week at the Fed’s press conference after policymakers lowered the fed funds rate by a quarter percentage point to 4.5% to 4.75%. Here’s the terse exchange between Powell and Politico reporter Victoria Guida:

Guida: Some of the president elect’s advisors have suggested that you should resign. If he asked you to leave, would you go?

Powell: No.

Guida: Can you follow up on—do you think that legally you’re not required to leave?

Powell: No.

Fed Chair Powell was not messing around. Yields on 10-year notes initially fell around four basis points on the back of that comment, capping an 11-basis-point drop on the day. Unfortunately, I’m fully aware that my peace plan may not be well received. 

Trump does not have an impressive record of pragmatism, nor is he known for extending olive branches to those with whom he disagrees. 

His first term was marked by a uniquely high rate of turnover in his cabinet, the firings often filled with reality show-like intrigue. He freely said what he thought, sometimes at the expense of jumps in yields and stock market volatility.

Also read: What’s at stake with the Fed, now that Trump has won?

And this time, he’s surrounded himself with people who seem uninterested in reining in his impulses.

Hedge fund manager Scott Bessent, a Trump advisor who could be a candidate for Treasury secretary, has floated the idea of nominating a “shadow” Fed chair who could start communicating with markets on a new direction for monetary policy even before Powell’s time is up—a dangerous departure that could cause real damage to the central bank’s policy credibility. 

What’s more, with the recent inflation experience and an even more daunting deficit picture, Trump may find a market that’s more sensitive to his whims than it was during his previous term.

It sure looks as though Trump is stuck with Powell for the next year and a half and even after, since his 14-year term on the Fed board doesn’t end until 2028. Trump can make this easy, or he can make it hard.

Choosing to undermine the Fed chair is a missed opportunity. Powell is a steady hand who—for whatever missteps he made by keeping rates low in late 2021— has engineered a relatively miraculous disinflation without driving up unemployment.

Powell can use this hard-won reputation to help ensure that sustained high borrowing costs don’t snuff out a housing recovery before it even starts and generally weigh on economic growth. That would also make it harder for Trump to build consensus around policy goals such as tariffs and tax cuts. 

Keeping Powell in the job is the right move for America—and probably the right move for Trump, who will need the economy at its best ahead of the 2026 midterm elections.

Also read: Fed Cuts Rates; Powell Says Wouldn’t Resign If Asked By Trump

There’s simply no upside for Trump in dragging out his beef with the Federal Reserve chief. If only that were a sufficient restraint. ©bloomberg