Trump’s Greatest Resistance Could Come From Wall Street

What happens if the irresistible force of President Trump meets the immovable object of Wall Street? Wall Street will win.

Nothing personal against Trump, of course. A lot of people on Wall Street support him. I remember the standing ovation he received last year when he spoke to the Economic Club of New York, which, despite its name, consists mostly of finance people, not economists.

But traders can’t afford to let sentiment or political preferences influence their decisions. If things start to go wrong and they conclude that Trump is bad for stocks and bonds, they will sell. That will push stock prices down and interest rates up. That will sting Trump, who cares a lot about the markets. Worse, it will hurt the nation’s finances, since high interest rates will raise borrowing costs and worsen the federal deficit.

In other words, Wall Street just might be one of the few institutions in America capable of constraining Trump, who has bent the Republican Party to his will, pushed the Democratic Party aside and exerted influence on the bureaucracy, the judiciary, corporations, the news media and other power bases.

It has happened elsewhere: Negative reactions from the financial markets doomed the prime ministerships of Silvio Berlusconi of Italy, who resigned in 2011 during a debt crisis, and Liz Truss of Britain, who resigned in 2022 after just 44 days in office when her promised tax cuts sent the British pound into a tailspin.

To be sure, the U.S. economy is in far better shape than Italy’s and Britain’s were at the times of those resignations, and the dollar is actually strengthening, not weakening. There’s no sign of the kind of crisis of investor confidence that would pressure Trump to deviate from his plans.

What’s more plausible is a strong nudge from the markets, not a hard shove. That would resemble what happened in the bond market crash of 1994, which led James Carville, President Bill Clinton’s adviser, to say he’d like to be reincarnated as the bond market because “you can intimidate everybody.”

In the 1980s, the economist Edward Yardeni coined the term “bond market vigilantes” for bond traders who constrain governments by pushing up interest rates when they sense that the governments are letting inflation get out of control. By selling bonds, which raises yields and thus the cost of borrowing, the vigilantes force governments to change their policies to win back the market’s confidence and get rates back down.

This week I interviewed Yardeni, now the president of Yardeni Research, an investment adviser. “I’m not a bond vigilante,” he said. “I’m sort of their social worker, I guess. I keep on top of what their mood seems to be.” Right now, he said, their mood is “twitchy.”

That’s because Trump’s agenda is potentially inflationary. He wants to raise tariffs, which will be partly passed through to American consumers in higher prices. He also wants to expel undocumented immigrants, which will put upward pressure on wages by shrinking the labor supply. And because he likes to be liked, he’s all in on tax cuts and unlikely to spend political capital on spending reduction outside of symbolic measures such as defunding the Corporation for Public Broadcasting and phasing out the penny.

Trump shrugs off the inflationary impact of his agenda. He says he’ll lower inflation through deregulation and increased oil and gas production. But deregulation is a slow and uncertain way of reducing prices, and the price of oil is set in the world market. Even if domestic producers could drag down the world price of oil, it’s not clear they would want to, since that might reduce their profits.

Right now the bond market and stock market are responding differently to Trump’s pronouncements. Stocks are still flying high. The S&P 500 stock index set a record on Thursday. Many analysts are optimistic about continued profit growth, especially at tech giants such as Apple, Microsoft and Nvidia.

The bond market is the twitchy one. Since September, the yield on 10-year Treasury notes has risen a full percentage point to 4.6 percent from a recent low of 3.6 percent in September. That has spilled over into higher borrowing rates on mortgages, car loans and business loans.

I want to pause here and admit that I am congenitally pessimistic about the markets and the economy. The only way I manage to stay invested is by closing my eyes and repeating “buy and hold” under my breath. I kept predicting that the Federal Reserve’s big rate increases in 2022 and 2023 would cause a recession long after most forecasters dropped their recession calls. Mea culpa.

On the other hand, this just might be the right time to worry about a strong negative market reaction to Trump’s policies. Neil Dutta, the head of economic research at Renaissance Macro Research, who was one of the first analysts to switch from pessimism to optimism in 2022, has been getting worried over the past year.

“We should definitely have our guardrails up,” he told me this week.

I predict that Trump will clash with Jerome Powell, the chair of the Federal Reserve, even more than he did during his first term as president. That’s because Trump wants both lower inflation and lower interest rates, a tricky combination. On Thursday, he said, “I’ll demand that interest rates drop immediately.” But the only tool the Fed has for lowering inflation is to raise rates, which reduces borrowing and cools off demand for goods and services.

In November, Dario Perkins, an economist for TS Lombard, a London-based economic research firm, warned of a “showdown between the populists and the vigilantes.” He wrote that if Trump takes on the Fed, “it is conceivable” that Powell might give free rein to the bond vigilantes “to teach President Trump a lesson.”

Powell knows that Trump won’t reappoint him as chair of the Board of Governors when his term ends in May 2026, so he might as well focus on his legacy of getting inflation down, even if that requires interest rates that slow economic growth, Perkins told me.

Fed policymakers are also showing hints that they don’t fully trust Trump’s deficit reduction plan and fear higher inflation ahead.

Their concern came through at Powell’s news conference after the December rate-setting meeting. While the official line is that the Fed will wait to see what policy is before reacting to it, Powell indicated that some Fed voters had started tentatively building higher inflation into their outlooks.

“The wait-and-see approach is the appropriate one now,” Darrell Spence, an economist for the Los Angeles-based Capital Group, told me. “You want to have thought through the scenarios, but you can’t really act on it until you see it put in place.”

Here’s how the Fed fits into the vigilante story: It can either fight against the vigilantes or fight on their side. If Fed voters think that the bond market is overly worried about inflation, they can take steps to hold down long-term interest rates, such as buying bonds. If they think the inflation concerns are justified, the Fed can raise the short-term rate it controls or just step aside and let the bond vigilantes do their work.

Over the past few months, the Fed has turned more hawkish, namely more concerned about inflation, which still hasn’t fallen to its chosen target of 2 percent. As recently as September, the median member of the Federal Open Market Committee projected the funds rate would be back under 3.5 percent by the end of 2025. By December, the median projection for the end of 2025 was half a percentage point higher, just under 4 percent.

The Fed was “in a forgiving mood” about the inflation potential of tariff increases in Trump’s first term but isn’t now after being pummeled for the Covid-related inflation spike, Dutta told me. “They’re basically talking out an insurance policy against potential inflation outcomes,” he said.

Amy Crews Cutts, an independent economic forecaster, predicts that the Fed will pause in its rate-cutting campaign while waiting to see what Trump does. More pessimistic than most forecasters, she is predicting about a two-thirds chance of a recession this year because of a combination of relatively high interest rates and Trump policies that harm growth, such as expelling undocumented immigrants.

Trump’s pressure on the Fed to do his bidding could also go seriously wrong. “The Fed’s going to feel that it has to be even more aggressive in fighting inflation than it would be otherwise, simply to show that they have not been captured by Trump,” Wendy Edelberg, a senior fellow in economics at the Brookings Institution, told me.

It will be bad news for Trump if his policies cause an adverse reaction from both the bond market and the Fed. They “certainly could constrain” his freedom of action, Paul Ashworth, the chief North America economist for Capital Economics, told me.

Again, nothing personal. It’s just business, Mr. President.

The Readers Write

You quoted Stephen Miran saying the path to success for Trump’s trade agenda is “narrow” and “will require careful planning, precise execution and attention to steps to minimize adverse consequences.” And what is the opposite of careful planning, precise execution and attention? Donald J. Trump.

Duff Campbell

Little Rock, Ark.

You mention that a Trump economist raised the idea of threatening to withhold protective military support from previously friendly countries in order to force their cooperation with Trump’s tariff objectives. A breakdown in the post-World War II network of friends could be devastating for world peace.

Peter Anderson

Madison, Wis.

You may be overthinking Trump’s obsession with tariffs. Trump, like most oligarchs, hates to pay taxes. I think he believes that a policy of universal tariffs would be a big source of revenue for the federal government and would reduce the pressure for higher taxes for the rich.

Jerry Place

Kansas City, Mo.

People stopped going to all the things your grandfather (and mine) spent time on because women were forced to, or wanted to, enter the work force. They were no longer at home to meet the neighbors and set up potlucks and write community cookbooks.

Alida Field

Danville, Calif.