Trump’s own actions against Powell and the Fed are working against him

Trump’s tariffs and the Iran war are pushing inflation higher and making a Fed rate cut less likely, with officials now signaling they may stay on hold for a prolonged period and could even consider hikes if price pressures persist. Cleveland Fed President Beth Hammack said her baseline is to remain on hold for a good while, while March US inflation reportedly rose threefold on a monthly basis due to the conflict. Trump’s efforts to remove Powell and Cook are also facing legal resistance, reducing the odds of near-term leadership changes at the Fed.

Analysis

The market implication is not just “higher for longer”; it is a higher probability of policy error on the hawkish side. By combining tariff-driven goods inflation with an oil/shipping shock, the administration has effectively narrowed the Fed’s ability to react to growth weakness, which raises the odds that real rates stay restrictive even if activity softens. That is a negative for rate-sensitive equities, but the bigger second-order effect is tighter financial conditions persisting longer than consensus expects, which should compress long-duration multiples across housing, software, and small caps.

A less obvious beneficiary is the front end of the Treasury curve if the market starts pricing no cuts and even a non-trivial hike tail. The 2s10s curve can steepen bearishly first as the market reprices the policy path, but if growth starts rolling over while the Fed remains boxed in, the curve could later bull-steepen violently; that creates a good setup for optionality rather than outright duration. In credit, the risk is not immediate default stress but spread widening in lower-quality consumer, retail, and levered industrial names as refinancing assumptions get pushed out another quarter or two.

The political/legal angle matters because it reduces the probability of a quick regime change at the Fed. If the chair remains in place and the board fight drags on, markets may stop treating “Fed independence” as a binary headline and instead price a prolonged credibility tax: more term premium in Treasuries, a stronger USD, and weaker small-cap relative performance. The consensus may be underestimating how much of the inflation impulse is second-order and sticky, especially if freight, insurance, and commodity pass-through persist after headline energy fades.

Key Decisions for Investors

• Buy 6-12 month payer swaptions or short-duration Treasury futures against the front end (e.g., TYZ/TUZ structures) to express a tail risk of no cuts or a hawkish surprise; target high convexity because the market is still anchored to eventual easing.
• Short IWM vs long QQQ on a 2-4 month horizon: small caps are more exposed to higher refinancing costs and sticky labor/input inflation, while mega-cap balance sheets can absorb a higher real-rate regime better.
• Add to XLU/XLRE shorts or buy puts on rates-sensitive REIT/utility baskets for the next 1-3 months; risk/reward improves if the market continues to push out the first cut and term premium rises.
• Pair long USD/short EUR or JPY via DXY-linked instruments for 1-3 months: a more hawkish-for-longer Fed and higher U.S. term premium should support the dollar even if global growth weakens.
• Own protection in HY credit via HYG puts or short high-beta CCC proxies over the next 3-6 months; the trade works if spreads widen on sustained restrictive policy rather than an immediate recession.