Trump Vs Powell Is The War That Really Matters

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“For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell said.

So far, the worst fears about the tariffs fueling an inflationary surge haven't come to fruition.“The effects on inflation,” he said,“could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent.”

Powell largely glossed over Trump's torrent of attacks on the Fed's autonomy, singling him out as a“numbskull.” The Fed, as Powell made clear, has yet to decide which is the bigger risk - inflation or a sharp slowdown in growth.

As Atlanta Federal Reserve President Raphael Bostic told Reuters ,“I would see the last quarter.. is sort of when I would expect we would know enough to move.”

Yet, notes Andrew Brenner at NatAlliance Securities, Powell was unable to“convince markets of hawkishness. The markets are telling Powell that he will be lowering rates much more quickly than he portrayed today. We just don't know about July. We would need a weak payroll report.”

Investors are paying close attention to events in the Middle East, where Israel and the US are clashing with Iran. Though Trump claims there's a ceasefire, he's already calling out Tehran and Jerusalem for early breaches of the deal.

In the meantime, Trump's war with the Fed is tantalizing markets. For now, many investors are cheered that Powell is proceeding carefully so as not to provoke Trump.

“Markets are finally breathing again,” observes Haris Khurshid, chief investment officer at Karobaar Capital.“The easing in Middle East tensions, paired with Powell striking a more flexible tone, is giving equities room to run and volatility a much-needed pause.”

Analysts at Evercore ISI note that Powell's testimony“continues to point to September as the next decision point and, on our read, is consistent with a September cut as a reasonable central case, but very far from guaranteed.”

There's clearly a range of opinions at the Fed about the need for rate cuts. Yet two Trump appointees seem ready to hit the monetary accelerator.

Fed Governor Michelle Bowman recently said that“should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”

Also, Fed Governor Christopher Waller said on CNBC that any tariff-fueled inflation is likely to be temporary and tentatively endorsed cutting rates next month.

Yet wildcards abound amid Trump's attacks on Iranian nuclear facilities and his tariffs. Apollo Global Management economist Torsten Slok can't help but wonder if there's some method to Trump's madness.

In a note titled“Has Trump Outsmarted Everyone on Tariffs?,” Slok notes that“maybe the strategy is to maintain 30% tariffs on China and 10% tariffs on all other countries and then give all countries 12 months to lower nontariff barriers and open up their economies to trade.”

Slok says that Trump, by extending the deadline for tariffs by one year, would give other countries and US companies ample time to adjust to a“new world with permanently higher tariffs.” This approach, he says, would reduce uncertainty, giving a boost to employment, business planning and financial markets.

“This would seem like a victory for the world and yet would produce $400 billion of annual revenue for US taxpayers,” Slok adds.“Trade partners will be happy with only 10% tariffs and US tax revenue will go up. Maybe the administration has outsmarted all of us.”

In the meantime, though, it seems clear that the dollar's days of being collateral damage amid Trump's one-man arms race are far from over.

The Japanese yen is now on the cusp of the 140 level to the dollar, as the US currency hits three-year lows versus a basket of top currencies. The worry in Tokyo is that a continued drop would trigger intense yen-selling and the unwinding of the so-called“yen-carry trade.”

On another, a plunging dollar would trigger an epic risk-off trade.

Paul Tudor Jones, who founded the $16 billion macro hedge fund Tudor Investment Corp, thinks a sharp dollar drop lies ahead as the Fed slashes interest rates. He thinks the dollar could be 10% lower within the next 12 months.