Trump & Powell: Who Really Matters for Markets—and Why Investors Might Be Overreacting

• The irresistible force meets the immovable object—there’s much drama and media gaslighting between the POTUS and Fed Chair, but other macro factors are at play

• A “shadow Fed” could emerge before Powell’s term ends

• Macro investors must monitor additional data points as the America First agenda is put in place

Donald Trump and Jerome Powell have a storied history. The president nominated the then-Fed Board of Governors member for Chair of the Federal Reserve in November 2017. Powell was approved by the US Senate Banking Committee the following month (the lone dissenter was Senator Elizabeth Warren (D-MA)), with the full Senate’s confirmation in January 2018. 

Succeeding Janet Yellen, who would go on to become the Treasury Secretary, Powell has caught the ire of Trump and Wall Street at times. History may remember the former partner at The Carlyle Group as heading a Fed that was late to combating inflation in 2021 and 2022. 

Trump and Powell: A Long, Complicated Relationship

Source: The White House

Powell’s legacy is not finished, though. His term is set to expire in May 2026, leaving plenty of time for him and the POTUS to jawbone. Shortly after President Trump’s November win, he went on record stating he wouldn’t try to remove Powell from the Fed chair. The day after the 2024 election, Powell was direct at a Federal Open Market Committee (FOMC) press conference, saying twice that the commander-in-chief was “not permitted under the law” to fire him without justified cause. Their spat moved to the background as broader economic and monetary policies came to the fore by January 20, 2025. But everything changed on Liberation Day.

PCE Inflation Above 2% Since February 2021, Above the Fed’s Mandate

Source: St. Louis Federal Reserve

The trade war has escalated, interest rates are volatile, and recession calls grow louder. Before stating outright that he has no plans to “fire Powell,” President Trump took to Truth Social, noting he looks forward to Powell’s termination, in true Trump-trolling style. The Fed chief fired back, reaffirming his intention to remain at the helm of the FOMC and brushing off pressure from the White House to lower interest rates. This tension adds to the pile of market unknowns, which may make it difficult for investors to position portfolios for what might come next.

Trump’s Gamesmanship Played Out on Truth Social

Source: Truth Social

Trump Assuages Market Concerns, Remarking He Does Not Intend to Fire Powell

Source: Fox Business

At Allio, we assert that the financial media is overblowing the importance of who the Fed chair is. While Powell wields significant influence over the FOMC, he is among 11 other voting members. Moreover, the Fed is infamous for merely following what the US 2-year Treasury yield does—if markets bend, the Fed is likely to break toward market signals. After Trump’s White House remarks about the chairman, Fed Governor Chris Waller, a dove, said he’d support rate cuts if tariffs drove job losses.

Still, Trump’s on-again, off-again public disdain for Powell, coupled with his reported discussions about replacing him with former Federal Reserve Governor Kevin Warsh, has sparked heated debate about the future of monetary policy and its implications for asset prices. 

Let’s explore the clash and what it means for investors, using Ray Dalio’s principles to frame the relationship in a broader context. We’ll even introduce a new term that macro-onlookers will soon hear a lot about: A “shadow” Fed.

Trump vs. Powell: A Macro Showdown

The friction between Trump and Powell is nothing new. During Trump 1.0, the president repeatedly criticized the Fed chair for hiking interest rates, arguing that the FOMC was stifling US economic growth potential. Trump, a former real estate mogul, understands how crucial favorable borrowing costs are to not only the property sector but also the economy writ large. 

The US central bank began lifting its rate in December 2015, ending its “zero interest rate policy” (ZIRP), which began during the Great Financial Crisis (GFC). The Effective Federal Funds Rate didn’t climb above 1% until well into Trump’s first year in office. By the first half of 2019, short-term borrowing costs were north of 2%, and the Trump vs. Powell battle began in earnest. 

Fed Funds Effective Rate: 2015-2021

Source: St. Louis Federal Reserve

You see, 2017 was among the stock market’s best years on record—a period of steadily rising equity prices and hardly any volatility, with investors and hard-working Americans looking forward to the Trump tax cuts that would begin the following year. While single-day declines in the S&P 500 have been more than 5% in 2025, the steepest drop over any stretch in 2017 was a mere 2.8%. Trump was happy, investors were happy, and the Fed grew increasingly worried about inflation.

S&P 500 Drawdowns: 2017-2018

Source: Koyfin Charts

Powell then assumed the Fed’s throne in February 2018. His task was to continue gradually ratcheting up near-term interest rates to keep the US economy in a good place while achieving the Federal Reserve’s monetary policy dual mandate of maximum employment and price stability. It was also his duty to reduce the massive Fed balance sheet through quantitative tightening (QT). Trump perhaps had second thoughts about his appointee, turned Fed chair, once interest rates started to creep up.

As the FOMC clamped down, the stock market began to crater. A fast 19.7% correction—very close to a technical bear market—ensued over less than three months from Q3 to Q4 of 2018. A Christmastime volatility spike marked the S&P 500’s bottom and a dovish Fed pivot. QT was halted, and the policy rate would soon fall as the spotlight shifted from tax cuts to a trade war. Trump laid down the gauntlet on Powell, calling him “insane” and labeling him as an “enemy.” 

Jumping ahead to today, it’s easy to see why this feud has sometimes turned heated, particularly in Trump’s eyes. It’s fair to say that the president views Powell as a macroeconomic puppet master of sorts, single-handedly keeping interest rates too high and “playing politics.”. The president is not shy about reminding investors that Powell was “asleep at the wheel” during the post-COVID Biden era. The rhetoric intensified in the weeks after Liberation Day, with tariffs commanding media headlines. 

In April, financial pundits lost their minds when Trump wrote on Truth Social that Powell’s “termination can’t come soon enough” and suggested he could remove him “real fast” if he felt like it. Before the president’s on-again, off-again frustration with Powell, rumors swirled that Warsh could replace Powell in May 2026 or before. 

Powell has no intentions of abdicating or being forced out of his role, though. A pragmatic former private equity executive, he is not one to back down from a high-stakes, public skirmish. Along with being steadfast as the leader of the FOMC, Powell does not want to see the economy, in his view, turn south due to tariffs. It’s as if he believes his Fed was on the 1-yard line, with the endzone being 2% inflation and a low, stable unemployment rate. Trump challenged the status quo, shocking markets in true Trumpian style from the White House Rose Garden on April 2, 2025, thus sparking a potential rematch between the president and Fed chair.

The Overreaction Problem

As the financial media sensationalizes every Truth Social post and piece of Fed speak, investors should remember that there are other macro x-factors. Ray Dalio's principle of “understanding the machine” urges market participants to center on the underlying economic chessboard and determinants, not personalities (even if Trump and Powell are the two most influential individuals). The Bridgewater Associates founder also warns investors not to succumb to first-order thinking—reacting to headlines without understanding the global macro system. So, behavioral finance and psychology play leading roles in the Trump vs. Powell spat. 

This overreaction problem stems from a misguided belief that the Fed chief controls interest rates. In fact, Powell is one of a dozen voters. Additionally, it’s the market, not the FOMC, that sets Treasury prices and yields. Powell, while influential, does not unilaterally dictate interest rates or balance sheet policies. Fed critics can point to the period from just a few years ago when the central bankers allowed inflation to rise significantly before tightening its interest rate screws. The fear now is that unemployment is at greater risk of increasing rather than inflation ticking up meaningfully and for a sustained period. 

Market-based inflation indicators suggest focusing on the inflation part of the dual mandate could be risky. Though the 2-year breakeven inflation rate (the difference between the yield of a nominal bond (a bond with a fixed interest rate) and the yield of an inflation-protected bond (TIPS, Treasury Inflation-Protected Securities) of similar maturity and credit quality) is elevated, forward breakeven rates are subdued. Much lower oil prices under President Trump are suppressing long-dated breakevens, and politically biased sentiment polls are essentially worthless in gauging future consumer price trends.

US 10-Year Breakeven Inflation is Tame Near 2.2%

Source: St. Louis Federal Reserve

Our team’s Macro Calendar insights properly frame reports like the University of Michigan Surveys of Consumers and The Conference Board’s Consumer Confidence barometers. We have pointed out that the New York Fed’s Survey of Consumer Expectations, while not perfect, is a better future inflation indicator.

In short, Powell and the Fed should put more emphasis on its employment objective today. It may be fighting the last war (Biden-era inflation), so to speak. Once again, behavioral economics enters the equation—recency bias impacts investors as much as it does Fed members. So, focusing on Powell as the primary threat misses the forest for the trees: Structural risks are many until Trump’s policies take full effect, no matter who leads the FOMC. Rather than buying into media gaslighting, investors would do well being second-order thinkers, taking in fiscal policy and global capital flows, while understanding the long-term debt cycle.

Indeed, the media’s hyper-focus on Trump’s more combative rhetoric would have served investors poorly–just days after the infamous Truth Social post cited above, the POTUS reassured investors (and those worried about a loss of Fed independence) that he would not terminate Powell. While anything can still happen, it was a clear example of how dangerous it can be to buy into the media’s depiction of Trump and the narratives they seek to spin.

Enter Kevin Warsh—and the "Shadow Fed"

Just as presidents become lame ducks as their term’s end date nears, a Fed chair can become less relevant, particularly if sharply different monetary policy leadership lies ahead. Kevin Warsh, a right-leading bank executive and husband to the heiress of the Estée Lauder family fortune, has long been touted as Powell’s successor. While we downplay the chair’s role in global macro trends, there’s no debating that Warsh is a hawk—he’s no fan of loose monetary policy that accepts above-target inflation.

Boasting a Wall Street pedigree and having personal ties to the stock market’s health, Warsh is generally considered business-friendly and unafraid to shake up the status quo. His potential ascent introduces the concept of a “shadow Fed”—a proposal floated by now Treasury Secretary Bessent in 2024 to undermine Powell’s authority.

The stock and bond markets may swing not only on explicit monetary policy shifts but also due to perceived power realignment if the shadow Fed increasingly clouds the macro landscape. This, too, is not all that new. Figures like former Treasury Secretary Larry Summers and former Federal Reserve vice chair Stanley Fischer moved markets with their words. Moreover, Alan Greenspan remained an oracle for policy interpretation for many years after he departed the Fed.

So, a shadow Fed would not necessarily be some nefarious outfit destabilizing the international monetary system; it would simply widen the circle of influence. What’s trickier is marrying Trump’s clear preference for lower interest rates and Warsh’s historically prudent feelings on how tight the Fed should operate. Trump aside, first-order thinking would point to higher short-term interest rates, less stimulus, and a faster unwinding of the Fed’s balance sheet. 

All else equal, that would pressure stock prices and lift the relative value of the US dollar. President Trump surely wants the opposite—a booming stock market in his final three years in office, along with a weaker greenback so households and businesses can thrive. We think Warsh and Trump would mesh similarly to how Bessent makes the proverbial omelet after Trump cracks the eggs. There are lots of unknowns for sure, but perhaps we should heed Dalio’s guidance and always be “radically open-minded.”

Allio’s portfolio management team constantly monitors macro variables while considering a range of out-of-the-box outcomes. Macro trends, global markets, and many other forces shaping the economy must be carefully assessed. Investors can invest with us, confidently allocating across asset classes using AI-powered portfolios and cutting-edge tools. Our strategies employ large language models to create dynamically optimized portfolios that adapt to market conditions, all while putting your goals first.

As markets begin to price in a new Fed chair, volatility could remain high or even increase. We look forward to the challenge of piecing together the future macro puzzle; opportunities will be many over the quarters to come. A new era of US Exceptionalism is in store—not fueled by government debt and spending excess, but one that puts American families, workers, and businesses first.

What Investors Should Watch

Nobody controls the machine. Dalio suggests that investors should assess incentives, and we could see near-term volatility as one relationship ends (Trump/Powell) and a new one potentially begins (Trump/Warsh). Maybe more importantly, Warsh’s chemistry with stocks, bonds, commodities, and the dollar must be eyed. Let’s break down some plausible scenarios and macro conditions:

1. Volatility as the Fed Shifts

The media aims to exploit narratives, attract eyeballs, and sell ads—Trump vs. Powell is a made-for-TV drama steering investors away from their long-term success. Markets will be on edge as Powell’s tenure comes to a close, with the Cboe Volatility Index (VIX) and the ICE BofA MOVE Index (MOVE), (the latter capturing Treasury rate implied volatility), staying high. Keeping with a global macro approach to asset allocation—holding stocks, bonds, interest-earning cash, commodities, real estate, gold, and cryptocurrency—is an all-weather strategy that may endure swings.

2. Dollar Trends and Capital Flows

Getting more granular, an indicator that has taken a backseat in previous regimes—the Treasury International Capital (TIC) data—could offer breadcrumbs on future intermarket relationships. If we see money exit the US, the dollar could decline, which would boost areas like gold or oil. Within 12-18 months, however, we expect a booming US economy, which would attract foreign investment.

3. Congress and Fed Policy Alignment

Powell’s term is up in May 2026, while the mid-term elections are just six months thereafter. Amid hoopla concerning the Fed, a divided government is the probable outcome by early 2027. Congress has the power of the purse, so there are unknowns about how lawmakers and monetary policy authorities interact. Expect President Trump to make his expectations clear as both dates near.

4. Fiscal Dominance

Ray Dalio reminds us that we are in the late stages of a long-term debt cycle. Political polarization and increasing debt monetization may “overshadow” the Fed and other central banks. Interest rate policy and the buying and selling of government bonds may play a supporting role in macroeconomic changes.

The Bottom Line

American dominance and prosperit