The conflict between the White House and the Federal Reserve is a contest of two economic paths in the U.S.

Introduction

In July 2025, tensions between the Trump administration and Federal Reserve Chairman Jerome Powell continued to escalate, becoming the focus of global financial markets. The Trump administration sought to exert greater influence over the Fed's monetary policy through public criticism, threats to fire Powell, and promoting the concept of a "shadow Fed chairman." At the same time, the minutes of the Federal Open Market Committee (FOMC) meetings, new tariff policies, and dynamics in the U.S. Treasury market added more uncertainty to the economic outlook.

This article will analyze the background and impact of this conflict, as well as its potential implications for the U.S. economy, global financial markets, and investors. It will explore the inflationary pressures, currency devaluation, and asset market performance that may arise from the "fiscal dominance" strategy of the Trump administration, in conjunction with the latest data and trends.

Background of the Conflict Between the Trump Administration and the Federal Reserve

History and Legal Framework

The Federal Reserve, as the central bank of the United States, has been granted independence by law, and its core mission is to achieve a "dual mandate": maximizing employment and maintaining price stability (with an inflation target of 2%). The Chairman of the Federal Reserve is nominated by the President but must be confirmed by the Senate, and the President has no authority to directly dismiss the Chairman unless there is just cause (such as misconduct). Jerome Powell has served as Chairman of the Federal Reserve since 2018, and his term will end in 2026, but his term as a board member will continue until 2028.

During his first term, Trump expressed dissatisfaction with Powell's high interest rate policy, referring to him as "Too Late Powell." In 2025, after Trump returned to office, this tension escalated further. Trump publicly criticized Powell for artificially raising interest rates, stating that the target rate should be lowered to 1%-2%, and threatened to nominate a new chairman in 2026, with candidates including Kevin Warsh and Kevin Hassett. A letter from Office of Management and Budget (OMB) Director Russ Vought accused the Federal Reserve of running a massive $235 billion deficit and criticized its building renovation project for going over budget, calling it "the Palace of Versailles," attempting to establish "justifiable reasons" for firing Powell.

"Shadow Federal Reserve Chairman" concept

The concept of "shadow Fed chair" reflects the Trump administration's attempt to influence the independence of the Federal Reserve by nominating candidates who support its policies. Recent remarks by Fed Governor Christopher Waller have been interpreted as signs of a "audition" for the next chair. He suggested reducing the Fed's balance sheet from $6.6-6.7 trillion to $5.8 trillion and increasing the holdings of short-term Treasury bills, which aligns with the Trump administration's strategy of reducing long-term bond issuance. Kevin Warsh is considered a more rational candidate, while Hassett may be more inclined to implement Trump's low-interest rate policy. This strategy aims to exert pressure through "Fed Speak" to influence market expectations without directly firing Powell.

Economic Data and Market Dynamics

Labor Market and Economic Recession Risks

The latest data shows that the number of initial unemployment claims is 227,000, at a historical low, indicating that the labor market remains resilient. However, the number of continuing claims for unemployment benefits has been rising since hitting a low in the summer of 2022, reaching a high level by June 2025. An increase in continuing claims is often a precursor to an economic downturn, even though the current unemployment rate is only 4.1%, still close to full employment levels. The Federal Reserve noted in the minutes of its May meeting that the labor market is softening, economic growth expectations have been lowered, with the annualized GDP growth rate for the fourth quarter of 2025 expected to be only 1.4%, down from the March expectation of 1.7%. This data suggests that the economy may be approaching a "stall" state, characterized by stagflation (high inflation and low growth).

Nevertheless, some economists believe that a recession is not imminent. Federal Reserve Chairman Powell stated in speeches in March and April that the U.S. economy is still in "good shape," but the uncertainty surrounding trade policies has led to a decline in consumer and business confidence. Concerns about a recession were exacerbated in early April by a stock market decline triggered by tariff policies, with the S&P 500 index falling by as much as 10%, entering a technical correction zone.

Government Bond Market and Yield Curve

The auction of 10-year and 30-year government bonds in July 2025 showed strong demand, both experiencing "stop-through," with bid coverage ratios of 2.61 and 2.38, indicating that bond prices were higher than the trading prices before the auction. Foreign demand (indirect bidders) accounted for 65.4% (10-year) and a high level (30-year), but the trend shows that foreign demand has broken the rising trend since the early 2000s and has recently declined.

Long-term bond yields have continued to rise since the Federal Reserve began cutting interest rates in September 2024, with the 30-year Treasury yield reaching 4.93%. This reflects a trend of "bear steepening," where long-term rates rise faster than short-term rates. Such a phenomenon is extremely rare during a rate-cutting cycle and indicates market concerns about long-term inflation expectations. The strategy of the Trump administration to reduce long-term bond issuance while increasing the supply of short-term Treasury bills has further exacerbated this trend. Short-term Treasury bills, due to their lower volatility, can be highly leveraged and have become the preferred collateral in the financial system, whereas long-term bonds, with higher convexity, exhibit greater volatility and have limited leverage.

The impact of inflation and tariffs

The Federal Reserve's meeting minutes show that inflation has been on a downward trend since April 2024, with the core PCE (Personal Consumption Expenditures Price Index) at 2.8% in March and overall PCE at 2.5%, close to but still above the 2% target. However, the tariff policies announced by the Trump administration (including a 145% tariff on Chinese goods, a 25% tariff on steel and aluminum, and general tariffs on Mexico and Canada) have raised short-term inflation expectations. Powell warned in speeches in April and May that tariffs could lead to "sustained" inflation rather than one-time price increases, and that long-term inflation expectations need to be anchored at 2%.

Despite Trump suspending some high tariff measures in April, delaying them until August 1, the market remains cautious about inflation prospects. Markets and surveys show that consumers and businesses have raised their near-term inflation expectations due to tariff expectations, but long-term inflation expectations remain stable at around 2%. Federal Reserve officials generally believe that the impact of tariffs may be more lasting than expected, especially against the backdrop of increasing global trade tensions.

Fiscal Dominance and Financial Suppression Strategies

The Rise of Fiscal Dominance

The Trump administration's "fiscal dominance" strategy is reflected in the following ways: reducing the issuance of long-term bonds and increasing the supply of short-term Treasury bills; promoting significant tax cuts and spending bills (such as the "big, beautiful bill"), which led to an expansion of the fiscal deficit; and requesting the Federal Reserve to lower the federal funds rate to near zero (currently 4.25%-4.5%). These policies aim to reduce the debt burden through negative real interest rates (where inflation rates exceed bond yields), similar to the "financial repression" strategy in the United States after World War II.

The Federal Reserve's balance sheet data shows that although the scale has shrunk from $7.2 trillion to $6.6-$6.7 trillion since the first quarter of 2022, the holdings of long-term bonds have hardly decreased, indicating weak demand. Waller suggested further reducing the balance sheet to $5.8 trillion and increasing holdings of short-term Treasury bills, which aligns with the short-term debt issuance strategy of the Trump administration. This strategy could lead to a surge in liquidity, driving up inflation, similar to the situation in 2021.

The History and Modern Applications of Financial Suppression

After World War II, the United States reduced its massive war debt through negative real interest rates and financial repression strategies. Currently, the Trump administration seems to be replaying this strategy. The real purchasing power of long-term bonds (such as TLT ETF) relative to gold has been continuously declining and has been on a downward trend since the early 2000s. Negative real interest rates (with the current inflation rate at 2.4% and short-term Treasury yields below this level) will result in negative inflation-adjusted returns for bondholders, thereby lowering the actual cost of debt.

This strategy is detrimental to the US dollar and may lead to currency depreciation. The US dollar index has recently seen a short-term rebound (rising from 97.2), but is bearish in the medium to long term, as negative real interest rates and an expanding fiscal deficit weaken the dollar's appeal. Gold prices are near historical highs, rising 65-70% over the past two years, while Bitcoin prices have surged to nearly $120,000, reflecting the market's pursuit of scarce assets.

Market and Investment Impact

Asset Market Performance

The S&P 500 index fell by 10% at the beginning of 2025 due to tariff uncertainties, but then rebounded close to February's historical high as Powell reiterated the robustness of the economy. However, the actual purchasing power measured in gold or Bitcoin shows that the S&P 500 has been essentially flat since the early 2000s, reflecting the impact of currency devaluation. In a high-inflation environment, the stock market may continue to rise nominally, but real returns could be constrained. During the populist period from 1965 to 1980, the S&P 500 lost 93% in actual purchasing power, sounding the alarm for investors.

Gold and Bitcoin have performed strongly as scarce assets in the current environment. Gold is sought after for its safe-haven properties, while Bitcoin attracts risk-tolerant investors due to its decentralized nature. The credit spread has narrowed, and the volatility index (VIX) quickly retreated after rising, indicating that the market is in a "risk-on" mode, similar to the liquidity-driven market of 2021.

Investment Strategy Recommendations

In an environment of fiscal dominance and financial repression, investors should focus on the following strategies:

  1. Scarce Asset Allocation: Gold and Bitcoin can serve as assets to hedge against inflation and currency devaluation. Gold is suitable for conservative investors, while Bitcoin is suitable for risk-takers.
  2. Avoid Long-Term Bonds: The real return on long-term bonds is negative, it is recommended to reduce allocation and focus on short-term Treasury bills to lower volatility risks.
  3. Selective Investment in Stocks: Technology stocks are overvalued and may face high tax pressure (such as taxes related to artificial intelligence to address unemployment issues). Choosing industries linked to inflation (such as energy and raw materials) may be more resilient to risks.
  4. Diversified Investment: Mitigate the risk of dollar depreciation through global asset allocation, focusing on inflation-hedging assets in emerging markets.

Conclusion

The conflict between the Trump administration and the Federal Reserve is not only a political game but also a reflection of the competition between monetary policy and fiscal policy. Trump attempted to lower interest rates to near zero through the concept of "shadow Federal Reserve Chair", public pressure, and a fiscally dominant strategy, while increasing the supply of short-term debt to stimulate economic growth. However, this strategy could lead to accelerated inflation, a weaker dollar, and increased volatility in financial markets. Under Powell's leadership, the Federal Reserve maintains its independence, adopts a wait-and-see approach, and emphasizes data-driven decision-making, but faces dual pressures from inflation and employment.

For investors, the current environment is filled with challenges but also contains opportunities. Scarce assets like gold and Bitcoin may perform well amid inflation and currency depreciation, while long-term bonds and traditional stock markets should be approached with caution. In the coming months, the final implementation of tariff policies, the pace of interest rate cuts by the FOMC, and the global economy's response to U.S. policies will be crucial. Investors should closely monitor the Federal Reserve's meeting minutes and the policy trends of the Trump administration to adjust their portfolios in response to potential "stagflation" risks.

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