We began the week with an ugly Monday as markets reacted negatively to President Trump’s criticism of Fed Chair Powell.  His words caused concerns of financial instability that rippled around the globe.

Then, on Tuesday, President Trump stated he had no intention of firing Powell and the markets have rallied the remainder of the week.

Whether the president has the authority to fire Powell isn’t really clear.  The Federal Reserve Act of 1913 establishing the Fed stipulates that members of its Board of Governors, appointed by the president and confirmed by the Senate to staggered 14-year terms, can be only be removed for “cause” – long thought to mean misconduct, not policy disagreement.

What do Beijing and Wall Street have in common?  Both are betting that President Trump will cave in to pressure and essentially abandon the tariffs before any major economic damage is done.  After the shock of tariffs levied against China during Trump’s first term, the Chinese have had five years to prepare themselves in case something like that would ever happen again.  Under China’s one-party rule, President Xi Jinping has little to fear from elections.  However, both President Xi and Wall Street know that US government policy is managed on 2-year time horizons, with midterm elections coming in November 2026.

They’re both betting that Trump isn’t interested in harming the Republicans’ leadership position in the US Congress.  They both know that Americans have little tolerance for economic pain before “throwing out the bums.”

So, the Chinese are comfortable waiting while Wall Street is confident in what they are calling the “Trump Put.”  A “put” is a contract investors often buy to limit the potential loss in an investment.  In essence, it puts a floor under an investment, limiting the potential loss to a specific amount.

A couple of weeks ago, markets dramatically reversed their declines after President Trump announced a pause in the application of tariffs.

Wall Street is currently behaving as if the tariffs do not necessarily pose a significant threat to the markets because President Trump would not allow a major decline for political reasons.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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