It was a weekend that should have shaken financial markets: The president slapped 30% tariffs on two of America’s biggest trading partners and went on TV to fume about the head of the Federal Reserve.
In a simpler time, a few months ago, such threats and the sight of the president’s team laying the legal groundwork to potentially unseat the head of the independent central bank might have been a reason for investors to panic. (And in fact, it was!)
But Wall Street barely flinched Monday, opting to tune out the Trump show and stay focused on the relatively cheerier programming on the horizon: a strong corporate earnings season beginning this week and signs that the economy is still in decent shape.
“The market has just sort of thrown up its hands and said, ‘geez, we can’t figure this out,’” Lawrence White, an economics professor at NYU’s Stern School of Business, told me Monday. “There will be something egregious — and now ‘egregious’ means really egregious — that will move the market one way or the other.”
But for now, White said, the markets are still in TACO mode, assuming that “Trump always chickens out” from his most extreme plans.
Of course, the TACO trade — in which investors buy the dip when Trump says he’ll do something, knowing he’ll back off — only works until doesn’t. Wall Street’s nonreaction appears to be reinforcing Trump’s belief in his own instincts around the Fed and US trade policies — even if they would be disastrous for the economy.
ICYMI: Late last week, Russell Vought, Trump’s director of the Office of Management and Budget, accused Fed Chair Jerome Powell of breaking the law by failing to comply with government oversight regulations and lying to Congress about details of an “ostentatious overhaul” of the central bank’s headquarters in DC.
(Worth noting here that Vought’s boss has transformed the Oval Office into what a Times op-ed recently called a “gilded rococo hellscape.”)
Trump and his advisers know they can’t just bust down the Fed’s door without triggering alarms on Wall Street and beyond. But they can test the limits of their executive power, floating statements into the media to see how and whether markets respond, like the velociraptors testing the fences for weakness in Jurassic Park.
White House officials told CNN last week there was no active effort to try to fire Powell, and Trump reiterated on Friday that he’s not trying remove the Fed chair even though Trump thinks he’s doing a “terrible job.”
The Fed, predictably, is not getting dragged into the muck. In response to Vought’s accusation, the central bank published a lengthy FAQ about the renovation over the weekend. And on Monday, CNN reported that Powell has asked the Fed’s inspector general to formally review the $2.5 billion renovation.
Powell famously refuses to wade into politics, and it seems no amount of playground name-calling from the president is going to rattle him. In fact, turning the screws on Powell is just as likely to backfire on Trump, as the monetary policy purists at the Fed will want to make it crystal clear they can’t be strongarmed by politicians looking for a short-term economic jolt.
For investors, there’s no point getting anxious — not yet, at least.
There’s an adage on Wall Street that advises to “sell in May and go away” as stocks have historically been weaker between May and October. But with Powell’s term expiring in May 2026, markets are now pricing in “Jay till May, then goes away,” said Westwood Capital Managing Partner Daniel Alpert.
“No one thinks he is resigning, and no one thinks that Trump’s bullying will do anything but stiffen Powell’s resolve,” Alpert added.
The TACO trade has been profitable, which is generally all Wall Street really cares about. But some analysts say the markets have grown a bit too comfortable in the discomfort of Trumpian uncertainty, especially around tariffs.
Stocks hit a record high last week, a fact Trump noted Thursday as evidence that his “tariffs have been very well received.” That appearance of approval from the finance world is risky, as it may embolden the president to double-down on the ideas — like universal tariffs and executive control over interest rates — that would ultimately hurt the economy.
“The market is overconfident that President Trump will once again reverse course before the August 1st tariffs take effect,” said Mike O’Rourke, chief market strategist at Jones Trading, in a note to clients Sunday night. “The new record highs for the S&P 500 have reinforced the Administration’s confidence that tariffs are the correct policy path. The stock market is arguably sowing the seeds for the economy’s negative reversal.”
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