The market's fever: How Trump's Fed fight fuels volatility

The financial markets seem to have caught a fever, a jittery oscillation that’s sent stock indices lurching and bond yields twitching. The proximate cause, or so the headlines insisted, was a public spat between President Donald Trump and Federal Reserve Chair Jerome Powell. This clash felt less like a policy debate and more like a personal vendetta on the global stage. Trump, never one to shy away from spectacle, declared that Powell’s “termination cannot come fast enough,” a statement that sent ripples of unease through Wall Street and beyond. By Tuesday, April 22, he had backpedaled, denying any intent to fire the Fed chief, but the damage was done. The S&P 500 wobbled, the dollar dipped, and pundits fretted over the sanctity of central bank independence. Yet, as Fisher Investments’ MarketMinder argued in a sober analysis, the volatility was less about the specifics of Trump’s outburst and more about a more profound, almost primal market sentiment — a “fear morph” that thrives in moments of uncertainty.

To understand this episode, one must first grasp the peculiar alchemy of markets in the Trump era. The former and now current president has always been a maestro of disruption, wielding tweets and offhand remarks like a conductor’s baton. His first term was a masterclass in this art: tariff threats against China would tank futures one day, only for a conciliatory phone call to send them soaring the next. In 2025, this pattern has returned with a vengeance. Fisher’s commentary notes that Trump’s tiff with Powell was not an isolated event but part of a broader narrative of policy unpredictability, from “Liberation Day” tariffs to musings on federal layoffs. Whether followed through on or not, each pronouncement acts as a spark in a tinder-dry market, igniting volatility that feels irrational and inevitable.

This disconnect between the breathless narratives and the mundane data reveals a truth about markets: they are as much a psychological phenomenon as an economic one. Nobel laureate Robert Shiller has long argued that markets are driven by “narrative economics,” the stories we tell ourselves about what’s happening and why. In this case, the story was one of existential threat: Trump’s attack on Powell was framed as an assault on the Federal Reserve’s independence, a sacred cow of modern economics. The fear was not baseless. A 1935 Supreme Court precedent, Humphrey’s Executor v. United States, underpins the Fed’s autonomy, stipulating that its members can only be removed “for cause.” Trump’s team has signaled an intent to challenge this, raising the specter of a politicized central bank.

The historical context adds nuance. The Fed has not always been an untouchable institution. In the 1970s, President Richard Nixon pressured then-Fed Chair Arthur Burns to keep interest rates low ahead of the 1972 election, a move many economists believe fueled the decade’s stagflation. More recently, Trump’s first term saw him repeatedly criticize Powell, calling him “clueless” and lamenting high interest rates. For his part, Powell has maintained a stoic resolve, emphasizing the Fed’s data-driven mandate. In a December 2024 press conference, he described the economy as “strong,” even as markets fretted over fewer anticipated rate cuts. This resilience suggests that Powell is unlikely to bend to Trump’s bluster, but the mere suggestion of interference is enough to unsettle investors.

Beyond the headlines, the market’s volatility reflects broader unease about the economic landscape. The Fisher commentary situates the Trump-Powell spat within a correction sentiment — a sharp, sentiment-driven drop of 10 to 20 percent, distinct from deeper, fundamentally driven bear markets. Corrections, they argue, are often fueled by “false fears,” exaggerated worries that lower expectations and set the stage for positive surprises. In early 2025, such fears abounded: tariffs on Mexico and Canada, announced with fanfare and then partially walked back, sparked volatility but failed to derail economic growth. The Atlanta Fed’s real-time GDP tracker showed continued expansion, even amid concerns about tariffs. Similarly, as measured by the University of Michigan’s gauge, consumer sentiment tanked in March, yet retail sales data suggested spending remained robust.

This resilience points to a paradox: markets may thrash about, but the underlying economy often plods along. Of course, the U.S. economy has a remarkable ability to shrug off political noise. Markets are forward-looking, pricing in not just current events but expectations of future outcomes. In 2025, those expectations are clouded by uncertainty about trade policy, monetary policy, and the political will to navigate a narrowly divided Congress.

Ultimately, the Trump-Powell tiff is less about the Fed’s independence than about the stories we tell ourselves in times of uncertainty. The markets, like a feverish patient, will eventually cool, driven not by headlines but by the slow grind of economic reality. For now, the volatility is a mirror, reflecting our anxieties and hopes. As Fisher Investments put it, “Patience and discipline generally prove wise and right.” In a world of soundbites and sell-offs, that may be the most radical advice of all.