(A)Political - May 10th

Good morning everyone,

Well, it’s definitely a busy week on Capitol Hill with no escalating tensions whatsoever. Let’s dive in!

The Fed kept rates unchanged as Chair Powell brushed off Trump’s pressure for cuts, prompting White House fury and sparking warnings about housing, small‑bank stress, and a stronger dollar. Vice President JD Vance declared the India–Pakistan flare‑up “none of our business,” signaling a hands‑off U.S. posture that leaves de‑escalation to regional players and tests America’s crisis‑management role. Trump’s flagship GENIUS Act for stablecoins collapsed in the Senate after ethics questions over his family’s crypto ventures, freezing federal efforts to create a U.S. digital‑asset framework.

• Fed’s Refusal Draws Flak

• Vance: Pakistan & India Aren’t Our Problem

• Trump’s Crypto Bill Dies on Arrival

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Fed’s Refusal Draws Flak

_{By: Atlas}

Federal Reserve Chair Jerome Powell and his colleagues left the federal‑funds target corridor unchanged at 4.25 % – 4.50 % for the third straight meeting, arguing that tariff‑driven uncertainty and lingering inflation risks warranted a “wait‑and‑see” stance. The decision frustrated President Donald Trump, who has lobbied publicly and privately for an immediate rate cut to offset the drag from his own trade measures and propel growth before the summer. Powell, asked whether political pressure factored into deliberations, replied that the Fed “will always consider only the economic data, the outlook, and the balance of risks.”

Why the Fed Is Holding Firm

In the post‑meeting press conference, Powell emphasized twin dangers: tariffs could raise consumer prices even as they dampen business investment, leaving policymakers to weigh higher inflation against higher unemployment. “The risks of both have risen,” he said, noting that forward indicators show softening in capital‑goods orders and sticky wage growth near four‑percent. Most large banks and futures traders expected the hold; CME FedWatch futures priced a mere two‑percent chance of a cut ahead of the meeting.

Powell’s reasoning echoes the Fed’s dual‑mandate calculus: with core PCE inflation still running at 2.8 %—above target—premature easing could revive price pressures that were only recently tamed from 2022’s four‑decade highs. At the same time, a still‑solid labor market (177 000 jobs added in April, unemployment at 4.2 %) gives the committee breathing room to monitor the real‑economy impact of the president’s tariff escalation before adjusting policy.

Trump’s Reaction and Political Pressure

Trump answered the hold with a volley of barbed Truth Social posts and on‑camera quips, labeling Powell “Too‑Late Jerome,” “a stiff,” and finally “a FOOL who doesn’t have a clue.” He argued that falling gasoline and grocery prices prove inflation is contained and that a rate cut would be “like jet fuel for the economy.” Later, speaking to reporters, he suggested Powell’s reluctance stemmed from personal animus: “Probably he’s not in love with me.”

The president stopped short of reviving threats to fire or demote the Fed chief but repeated that “everybody’s cutting but him,” referencing recent easing moves by the Bank of England and European Central Bank. Conservative commentators amplified the charge, warning that high real rates could blunt the fiscal impact of new industrial‑policy subsidies and dampen markets just as the administration attempts to renegotiate trade truces.

Congressional and Market Backdrop

On Capitol Hill, many Republicans voiced sympathy for Trump’s growth argument yet defended Fed independence. Representative Frank Lucas called Powell “a stabilizing force,” while Senator Kevin Cramer cautioned that another leadership fight “would shake markets.” Bond traders appeared to agree: yields barely budged after the hold, but a brief sell‑off erupted when rumors resurfaced that the White House might try to replace Powell—highlighting how political uncertainty itself tightens financial conditions.

Equities, meanwhile, reacted with mixed signals: rate‑sensitive home‑builders dipped, but industrials rallied on hopes tariffs would spur domestic investment. Dollar strength persisted, complicating export prospects for manufacturers already facing retaliatory duties.

Second‑Order Economic Effects

Powell’s refusal to cut now sets in motion several potential spillovers:

• Corporate Financing Costs: Investment‑grade yields remain more than 150 basis points above 2023 lows, pressuring balance sheets of capital‑intensive firms. If rates hold through autumn, refinancing waves in energy and telecom could stall capital‑expenditure plans, slowing job creation just as election season peaks.

• Housing Affordability: Thirty‑year mortgage rates, hovering near seven percent, have already chilled existing‑home sales to a ten‑year low. Continued Fed restraint risks deepening regional price corrections, especially in Sunbelt metros that boomed during pandemic relocation surges.

• Dollar and Trade Balance: Higher U.S. yields attract foreign capital, keeping the dollar elevated. That dynamic could widen the trade deficit despite tariffs, undercutting Trump’s goal of boosting domestic production and potentially inviting additional levies that feed the inflation the Fed fears.

• Financial Stability: Money‑market funds now dwarf bank deposits as savers chase attractive Treasury‑bill yields. Prolonged high short‑term rates accelerate the migration, pressuring smaller banks dependent on cheap deposits and raising the specter of renewed regional bank stress.

Conversely, some second‑order effects favor Powell’s caution. Elevated carry costs may cool speculative excesses in commercial real estate and technology, sectors where valuations detached from fundamentals during zero‑rate years. And by preserving policy ammunition, the Fed remains positioned to slash aggressively if tariffs trigger a bona fide recession later this year.

Outlook

Futures traders still see a three‑cut path by early 2026, but only if incoming data confirm weaker hiring and softer core inflation. Goldman Sachs projects quarter‑point reductions starting in July “unless tariff shock hits harder than expected,” while JPMorgan says the Fed may stay on hold until December if headline CPI flares above three percent.

For Trump, the political calculus becomes trickier. Sustained high borrowing costs could crimp the very infrastructure and defense projects he touts, while a public feud with the Fed risks rattling investors wary of compromised independence. Yet the president shows little sign of relenting; aides hint he may float alternative nominees to vacant Fed board seats who share his dovish instincts—an incremental route to influence even if Powell keeps the chair through 2026.

Powell, for his part, seems resolute. Asked whether Trump’s barbs matter, he offered a tight smile: “It doesn’t affect our job at all.” If upcoming data validate his patience—holding inflation near target while growth slows only modestly—he may reinforce the institutional norm that monetary policy bends to evidence, not tweets. Should the economy sour sharply, however, critics will blame the Fed for being, in Trump’s words, too late.

In the end, the stand‑off underscores an enduring tension of American macroeconomics: elected officials crave quick stimulus, while central bankers weigh longer horizons. How that clash resolves over the next few quarters will shape not only the 2026 rate path but the credibility of the world’s most influential central bank.

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