The markets are turning out to be the only effective restraint on the Trump administration as it continues its chaotic attempts to remake the global trading order. As of now, the markets appear to be winning, with President Trump seemingly stopped in his tracks on two key fronts.
On 22 April, Trump said he had no intention of firing Federal Reserve Chairman Jerome Powell, sending US markets soaring.
On 21 April, markets had plunged after Trump asked the Federal Reserve to cut rates and slammed Chairman Jay Powell. To be sure, US markets are overvalued, but Trump’s remarks served to exacerbate the uncertainty that is making markets jittery. Yields on longer-term treasuries, on which the Trump administration is fixated, rose, and the dollar fell.
Before the backtracking on 22 April, Trump had made a series of increasingly belligerent statements, including one in which he said that Powell’s termination could not come soon enough. Government lawyers had been seeking to determine how Powell could be fired, according to a story in The Wall Street Journal. But markets were throwing a huge tantrum at the prospect of Powell’s sacking—and they prevailed.
According to market commentary, a ‘sell America’ sentiment had taken hold since the so-called ‘Liberation Day’, with investors selling stocks, the dollar, and bonds because the US—or more precisely, its leader—was behaving like an unstable third-world country.
The step back from a possible sacking of Powell wasn’t the only instance in which the 78-year-old President blinked. Markets were also cheered when, on 22 April, Treasury Secretary Scott Bessent said the status quo regarding China was “unsustainable”. President Trump followed up by suggesting that he would cut tariffs on China from the current level of 145%, though not to zero.
Further remarks by Bessent on 23 April suggested that an eventual reduction of tariffs would have to be contingent on successful talks with China on a wide range of issues, including non-tariff barriers.
Other guardrails
This is likely to be a pattern as the tumultuous Trump presidency approaches 100 days. The other major guardrails of democracy are supposed to be the US Congress and the courts. But the Republican Party, which has a narrow majority in both houses, is in complete thrall to President Trump in a manner that is almost unprecedented in history. President Nixon, who had won a landslide victory in 1972, had to resign two years later as Republican members would not support him in likely impeachment proceedings. All this is far removed from the current scenario.
While the tariffs are facing legal challenges from several states over whether there is an economic emergency which would warrant Congress being bypassed, it is unclear if the courts would wish to step in.
US courts have ruled against Trump in several cases but have found it difficult to enforce their rulings—notably in the case of immigrants ‘mistakenly’ deported to El Salvador.
So far, when it comes to exerting sufficient pressure to make the President backtrack, only market signals have worked. On 11 April, President Trump had put reciprocal tariffs on hold after US bond yields spiked. Shortly thereafter, smartphones, laptops, and other electronic items—most of which are imported from China—were excluded from the higher tariffs on China.
A 20% tariff on the world’s second-largest economy remains in place.
Truss and Mitterrand
This is not the first time that the leader of a major economy has had to change course after a market revolt. In October 2022, Liz Truss famously had to resign as UK Prime Minister after just over 40 days because of a market revolt over unfunded tax cuts. Truss believed that tax cuts would rouse the animal spirits and boost economic growth.
It turned out that markets were more concerned about rising deficits, debt, and the impact on pension funds of rising bond yields (falling prices). Borrowing costs rose as yields spiked and the pound fell, leading to Truss’s resignation.
Truss blamed the episode on conspiracies hatched by what she referred to as the “economic establishment”. Once upon a time, the economic establishment used to be aligned with governments considered right-wing. No longer, it seems.
Going further back, French President François Mitterrand had to scale back a conventional left-wing programme in the early 1980s involving nationalisation and higher spending because markets reacted badly.
Continuing uncertainty
The fallout of Liberation Day exacerbates uncertainty both for countries such as India that are trying to reach trade deals with the US, and with corporate decision-making in general.
Sections of the US administration have suggested that trade deals with countries such as India, Japan, South Korea, and Vietnam are intended to isolate China. But this theory doesn't hold if the US eventually reaches terms with China on tariffs—an event which seems increasingly likely.
Companies seeking to invest in India as part of an attempt to build non-China supply chains will find it difficult to decide if it's not clear where the tariffs will eventually end up with regard to China.
In fact, it’s entirely possible that US policy towards China ends up somewhat close to the Biden administration’s ‘high fence, small yard’ strategy—aimed at restricting imports of high-technology items such as top-end chips and the machines that make them, while trade in items like cellular phones, shoes, and textiles continues as before.
The uncertainty is exacerbated by the fact that multiple trade agreements are being negotiated. For instance, India looks better placed than Vietnam as it faces lower reciprocal tariffs—26% compared to 46%. But there’s no clarity on what the ‘final’ tariffs will be.
Lots of market turmoil lies ahead.
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