MW Trump's climbdown against the Fed looks very bullish for bonds

By Brett Arends

A slowing economy, an independent Fed: What's not to like?

Predictions make fools of us all, especially these days and in this environment. But President Donald Trump's new declaration that he has "no intention" of firing Federal Reserve Chair Jerome Powell should - in theory, anyway - be very good news for bonds.

It potentially lifts a huge cloud of uncertainty that has been depressing bond prices for weeks.

It should reassure investors that the Fed retains a free hand in its fight against inflation, something that's critical for the bond market.

And it comes after weeks of turmoil and signs of a slowing economy - exactly the circumstances that should be catnip for high-quality bonds, such as Treasurys, municipals and investment-grade corporates.

Naturally, there is the obvious caveat: The president might conceivably reverse himself again, though for reasons I'll explain, that seems unlikely.

The bond market initially rallied on Wednesday before partially reversing itself amid further uncertainty, this time about Trump's trade war with China.

The turmoil has nonetheless left Treasury bonds paying higher rates of interest than before the shakeup really began on April 2. At the latest check, 5-year Treasurys BX: TMUBMUSD05Y were yielding about 4% and 10-year Treasurys nearly 4.4% BX: TMUBMUSD10Y.

Does this make any sense?

The economy is slowing. Don't just look at the stock-market gyrations as a harbinger. Listen to company executives. Since Trump shocked the world with his tariff plans on April 2, a range of U.S. companies have warned that the tariffs, turmoil and all-around policy uncertainty may be hurting business. These include home builder D.R. Horton $(DHI)$; Huggies and Kleenex parent Kimberly-Clark $(KMB)$; trucking company J.B. Hunt $(JBHT)$; banks Goldman Sachs $(GS)$, JPMorgan Chase $(JPM)$ and Wells Fargo $(WFC)$; investment giant BlackRock $(BLK)$; booze company Constellation Brands $(STZ)$; car dealer CarMax $(KMX)$; air carrier Delta Air Lines $(DAL)$; and luxury furniture retailer RH $(RH)$.

Meanwhile, data tracked by the Atlanta Federal Reserve show that the economy may already have fallen into a contraction in the first quarter, even before Trump's "liberation day" tariff announcement.

All this should be good news for higher-quality bonds - especially Treasurys, municipals and investment-grade corporates. These are usually safe-haven assets in a slump, a slowdown or times of uncertainty. That's because of their stable coupon payments and strong principal protection. Public-sector bonds come with a government guarantee, while top-quality corporate bonds are backed by strong balance sheets and cash flow.

Immediately after April 2, bonds performed as expected. Prices jumped and yields, which move in the opposite direction to prices, fell. It's notable that this initial move stopped, and then reversed itself, only when the president began his war of words against the Fed and Powell on April 4.

Donald Trump spooked the bond market.

It's an open question whether Trump ever had any serious intention of trying to fire Powell or whether he was just setting the Fed chair up as a public scapegoat in case tariffs caused a recession.

Firing Powell might not be legally possible - or politically feasible.

And the events of Monday have surely killed it as a policy option. Just the suggestion that the president might try to fire Powell resulted in panic in the stock and bond markets, in the U.S. and around the world. Can you imagine what would happen if Trump actually tried to do it?

We have to figure that they have considered all of this in the West Wing.

Meanwhile, Powell shows no sign of being afraid of the president, his court or the folks in red hats. He is 72, independently wealthy and due to retire from his position as Fed chair next year anyway. Every signal he has given in recent years shows that he is determined not to repeat the mistakes that the Fed made in the 1970s, when it bowed to political pressure, cut interest rates too early and let inflation take hold. Powell has repeatedly said he is willing to keep rates higher for longer - as long as it takes to bring inflation back down to the Fed's 2% target level and keep it there.

So: An economic slowdown, a strong Fed and bond prices that had been artificially depressed, until now, by a factor that has suddenly been removed. If this isn't bullish for bonds, you could've fooled me.

-Brett Arends

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April 23, 2025 15:43 ET (19:43 GMT)

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