Donald Trump has returned to the White House, bringing with him a political style that has both his supporters and detractors on edge. While his loyal followers are dreaming of a new economic boom, his opponents are holding their breath, wondering if the next stock market crash is on the horizon.
Trump himself points to 1987, the year the financial markets experienced a dramatic downturn, only to rapidly recover afterwards. However, it’s possible that he is merely bluffing. A calculated move to put Jerome Powell and the US Federal Reserve under pressure?
The markets are wavering and uncertainty is growing – and that could be Trump’s goal. If the fear of a crash becomes great enough, Powell might be forced to lower interest rates to stabilize the economy. A rate cut would boost stock market performance and make Trump appear as a brilliant economic tactician. But what if Powell doesn’t yield?
His economic policies leave little doubt that he is willing to take risks. Corporate tax cuts, protectionist measures and a confrontational approach to the Fed – all of this sounds like a mix that could temporarily boost the stock market, but ultimately lead to overheating. Memories of 1987 come to mind, when excessive market intervention, rising interest rates and uncontrolled mechanisms culminated in the Black Monday.
Trump would not be Trump if he didn’t take the risk of deliberately destabilizing the markets – in the hope that Powell would give in. But if the calculation doesn’t work out, he could trigger a domino effect that would be impossible to stop.
Trump knows that fear is a powerful instrument in the financial markets. A threatened collapse can panic investors and push the Fed into a defensive position. It’s a tried-and-true tactic: threaten with the worst-case scenario to force the other side to give in. For Trump, it might not be about actually crashing the markets, but about getting Powell to lower interest rates, which would be a political boon.
A weakening economy would be poison for his re-election strategy. Lower interest rates could boost economic growth, stabilize the stock market and give voters the impression that under Trump, everything is back on track.
Will Powell fall for this ploy?
The Fed chairman has shown in the past that he is not easily manipulated. However, he is under pressure: inflation is not yet fully under control and the economy is demanding cheap money. A too-early rate cut could be risky and rekindle inflation, while a too-late rate cut could harm the markets and give Trump a new attack point.
Trump has already hinted that he might fire Powell if he doesn’t act in his favor. Although this is not legally simple, the threat alone could have an effect. The Fed is facing a dilemma: if it gives in to Trump, it risks losing credibility. If it holds firm, it risks being overwhelmed by a presidential storm.
The lessons of 1987
The comparison with 1987 is not accidental. Back then, rising interest rates and geopolitical uncertainty played a role in the crash. Today, it’s different factors: trade conflicts, global debt and the fear of another banking crisis.
However, the parallels are not to be dismissed. If Trump really is betting on Powell giving in and this doesn’t happen, the scenario of 1987 could be repeated. The financial markets are sensitive to uncertainty and uncertainty is what Trump is best at creating.
Trump’s threats could turn out to be a bluff, but they can’t remain without consequences. The markets are nervous, investors are hesitant and the Fed is under pressure. Whether Powell gives in or holds firm will be decisive for the stability of the economy.
Trump is playing the game with high stakes. And the question remains: will it be a brilliant move or a costly mistake?