Let Powell drive the bus

No one likes backseat drivers, but if they lunge for the steering wheel, you can’t ignore them. That’s the position that President Trump has repeatedly put Federal Reserve Chair Jerome Powell in when he attacks him for refusing to cut interest rates. Presidents occasionally chirp about Fed policy, but Trump’s tweets go well beyond that.

Perhaps because cash managers deal in securities that don’t know the meaning of VIX, we do our best to ignore Trump. And maybe everyone should. But the problem is not that administration lawyers might find a legal loophole to remove Powell, usurp Fed independence with a “shadow chair” or do something more drastic. Those alternatives would take the sort of energy, expertise and political equity the administration might not have for something most voters don’t prioritize. It's that Powell’s term as chair is set to expire in May 2026, which means he will essentially be a lame duck in a few quarters, and Trump's assault could accelerate that timeline when we need strong leadership. And though Trump might want to hand-pick his successor, the nominee must come from the group of standing Fed governors. That could mean the new chair might not hold wildly different opinions, as Powell has shown a commanding influence on the Fed board and FOMC over the years. He’s been challenged more in the last few quarters, with some dissention, but it seems they largely support his view of economics.

So, cue the debate that likely will ensue at the FOMC meeting next week. It would not be surprising if Powell and most of the voting members push back against the fed funds futures call for as many as four quarter-point cuts over the rest of 2025. A cut is extremely unlikely, but expect guidance about how the tariffs could exacerbate the stickiness of inflation and more clarity on the hard/soft data dichotomy. Can policymakers continue to dismiss the nosedive in consumer sentiment? Will they downplay GDP's first-quarter contraction?

The bond market also seems to be in favor of that 100 basis points of easing, teaming up with traders and Trump to bully Powell. But then again, might bond vigilantes instead focus on the potentially inflationary tariffs? Isn’t that the reason for the 90-day delay? All the uncertainty is the main reason we are of the opinion that three rate cuts in the second half of this year are in order.

Where does this put the money markets? Yields might decline faster than they might have absent the current proposed tariffs. But we expect they will remain relatively attractive. We also anticipate continued growth of assets under management. Stocks are acting like the worst is behind us, but the White House is sure to smack them again, potentially pushing investor assets to the relative safety of liquidity vehicles. Money market fund assets across the industry continue to hit record highs and value can be found, especially in the longer end of the liquidity yield curve. In a complex time like this, we’d like to think that investors also appreciate active management driving their portfolios.

X marks the spot, but Treasury might need a new map

April was an odd month for the Treasury Department. Most prominently, Secretary Scott Bessent became the adult in the room on tariffs. Less noticed was that the so-called “X date” deadline for the debt ceiling was likely extended to the fourth quarter as individual taxpayers sent more-than-expected money to the government, which resulted in a cutback in Treasury issuance.