Trump vs. Powell: Why the Fed Chair Stayed Hawkish

Last week, a public clash between President Donald Trump and Federal Reserve Chair Jerome Powell grabbed headlines. Trump demanded lower interest rates, claiming, “Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!’ … Powell’s termination cannot come fast enough!” Powell, however, stood firm, stating, “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” At Vaultis Private Wealth, we believe this spat reveals critical insights about the Fed’s priorities. This firm rate policy—favoring steady rates to stabilize markets—potentially signals Powell’s focus on protecting the U.S. Treasury market amid uncertainty. In this article, we explore why Powell responded this way and what it means for your portfolios.

Trump’s push for rate cuts aims to spur economic growth, particularly as consumer confidence falters amid tariff concerns. Recent data presents a mixed picture: real GDP grew at a 2.4% annual rate in Q4 2024, down from 3.1% in Q3, signaling a slowdown. Q1 2025 growth forecasts range from -2.2% annualized (Atlanta Fed GDPNow) to 2.5% (Philadelphia Fed), reflecting tariff pressures. Inflation, measured by the Consumer Price Index, eased to 2.4% in March 2025, yet remains above the Fed’s 2% target. Powell’s firm rate policy—maintaining steady or higher rates to curb inflation and stabilize markets—clashes with Trump’s agenda, underscoring the Fed’s independence. By prioritizing bond market stability, Powell aims to prevent disruptions that could worsen economic stability.

A key factor to consider is that Powell’s hawkish rate policy stems from his focus on stabilizing the U.S. Treasury market, where bonds fund government borrowing. The U.S. faces a projected $2.4 trillion budget deficit for fiscal year 2025 and $9.7 trillion in debt refinancing, boosting Treasury supply, while foreign investors, holding $8.7 trillion (30% of marketable Treasuries), may buy less amid tariff tensions (https://vaultis.com/knowledge-center/foreign-ownership-in-us-treasuries). Think of the Treasury market like an auction: too many bonds for sale and fewer buyers could push yields higher, risking instability. This unique scenario—waning demand alongside rising supply—presents risks that could destabilize the treasury market. By maintaining steady or higher rates, it is possible Powell is attempting to ensure demand for Treasuries and a stable financial system.

Powell’s hawkish stance, long-term supply dynamics, and potential demand reduction suggest U.S. Treasury yields may remain elevated, impacting bond portfolios. The 10-year Treasury yield, currently at 4.35%, has seen significant swings over the past two weeks. For instance, it rose from 4.0% on April 1 to 4.5% by April 11 before settling at 4.41% on April 21 all while we experienced equity market volatility. Bonds are typically seen as a safe haven in portfolios but when yields rise, prices fall, creating risks for investors holding longer-term bonds. Allocating to shorter-term bonds, which are less sensitive to rate changes, may help manage this risk, though strategies must align with your financial goals and risk tolerance. At Vaultis Private Wealth, we’re guiding clients to review fixed-income allocations to navigate these market pressures, ensuring our client portfolios are properly positioned.

The public spat between President Trump and Federal Reserve Chair Jerome Powell marks a pivotal moment for monetary policy. By maintaining steady or higher rates, Powell is likely seeking to address the risks in the treasury market. This firm rate policy counters Trump’s aggressive push for rate cuts, underscoring the Fed’s resolve in turbulent times. At Vaultis Private Wealth, our cautious approach to long-term Treasuries reflects the risks of elevated yields and market pressures outlined in this article, demonstrating our commitment to prudent, data-driven strategies for navigating complex markets.

Disclaimer:

This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. Data and projections, including budget deficits, Treasury yields, and economic forecasts, are based on sources believed to be reliable but are subject to change and inherent uncertainties. Forward-looking statements, such as potential market impacts from tariff or policy changes or investment strategies, involve risks, including lower yields or reinvestment risks for bond strategies, and may not occur as anticipated. Past performance does not guarantee future results. Investing involves risks, including loss of principal. Consult a professional for personalized guidance tailored to your financial goals and risk tolerance.

The Risk of Foreign Ownership in U.S. Treasuries

We find ourselves in a unique place in the fixed income market, specifically with Treasuries. On April 4, 2025, the 10-year Treasury yield closed at 4.009%, only to climb to 4.494% by April 11—despite significant volatility in the equity markets. Historically, investors flock to the safety of U.S. government bonds during periods of stock market stress, driving yields lower. In this blog, we explore a critical factor we are closely monitoring: the risks posed by foreign ownership of U.S. Treasuries.

Foreign investors and central banks currently hold approximately $8.5 trillion in Treasury securities, representing roughly 30% of the total marketable Treasury debt. This substantial share underscores the importance of international demand in sustaining the Treasury market’s stability. However, this reliance introduces vulnerabilities, particularly in an environment shaped by President Trump’s “America First” policies and intermittent tariff proposals. Should foreign investors or central banks respond to trade tensions by selling their Treasury holdings or refraining from purchasing new issuances, the impact on the Treasury market could be significant.

The scale of this risk becomes evident when we consider the U.S. government’s borrowing needs. Over the next 12 months, approximately $9.3 trillion in Treasury debt is projected to mature, while the federal budget deficit is expected to reach $2.6 trillion. Together, this necessitates issuing roughly $12 trillion in new debt—a considerable figure relative to the $29 trillion marketable Treasury market.

If foreign demand weakens, whether due to retaliatory trade actions or other factors, yields could rise sharply as the Treasury competes for buyers. Higher yields would elevate the government’s interest expenses, exacerbating the fiscal deficit. We suspect this dynamic may have influenced President Trump’s recent decision to delay tariff implementations, as rising yields signaled caution in the bond market.

This foreign ownership risk is but one consideration in a multifaceted Treasury market (e.g., inflation, Fed policy, recession). On the supply side, the U.S. fiscal outlook suggests persistent government spending, requiring continuous issuance of Treasuries to finance deficits. Any disruption to demand—foreign or otherwise—could push rates higher, challenging the historical perception of Treasuries as a risk-free safe haven.

Foreign ownership of Treasuries during a potential trade war is one of multiple reasons we have found ourselves cautious about owning long-term Treasuries in our client portfolios. While historically considered a safe haven, the unique combination of factors at play introduces the risk that rates may need to increase in the coming years to satisfy the growing supply of Treasuries. When looking to reduce risk in our client portfolios, we are focusing on shorter-term, less interest-rate-sensitive fixed income areas.

Disclaimer: This blog post is provided for informational purposes only and does not constitute investment advice, legal advice, or a recommendation to buy or sell any securities. Investing involves risks, including the potential loss of principal. The views expressed reflect Vaultis Private Wealth’s analysis as of April 14, 2025, and are subject to change without notice. Past performance is not indicative of future results. Please consult a qualified financial advisor to discuss your individual circumstances before making investment decisions.

Navigating Fixed Income in a Changing Landscape

In the world of investing, bonds have long been considered a safe harbor, a reliable counterweight to the volatility of stocks. However, at Vaultis Private Wealth, our outlook on bonds is more nuanced as we recognize that the fixed income landscape has evolved significantly in recent years. We believe that many investors may be underestimating the risks lurking within their fixed income allocations. As the financial landscape evolves, it's crucial to reassess the role and risks of bonds in modern portfolios.

Current Market Risks in the Bond Sector

The bond market today faces a storm of challenges that investors cannot afford to ignore. At the core of these challenges is the precarious fiscal situation in which many developed economies, including the United States, find themselves. Massive government spending and ballooning deficits have led to unprecedented levels of national debt. This fiscal reality puts significant pressure on the bond market, potentially leading to higher yields and lower prices.

Moreover, inflation has become a persistent and unpredictable concern. While we've seen periods of moderation, it's likely that we'll continue to see inflation ebb and flow in the coming years. This cyclical nature of inflation creates a challenging environment for bonds. During inflationary spikes, the real value of bond returns erodes quickly. Conversely, when inflation moderates, central banks, particularly the Federal Reserve, may adjust interest rates, causing bond prices to fluctuate. This constant push and pull makes it difficult for bonds to deliver consistent real returns.

From a real return perspective – that is, returns after accounting for inflation – the outlook for traditional bonds is particularly challenging. With nominal yields still relatively low by historical standards, even modest inflation can significantly eat into returns. As inflation waxes and wanes, many bond investments may struggle to provide meaningful real returns over time. This situation creates a significant hurdle for investors relying on bonds for wealth preservation and income, as the purchasing power of their bond returns may be consistently undermined by inflationary pressures.

The Danger of Complacency in Fixed Income Investing

Despite these clear and present risks, many investors and advisors continue to treat their bond allocations with a "set it and forget it" mentality. This complacency is particularly concerning given the stark reminder we received in 2022 of how quickly bond markets can turn.

In 2022, as interest rates rose sharply, many bond investors experienced significant losses – a reality that caught many off guard. The Bloomberg U.S. Aggregate Bond Index, a common benchmark for the broad bond market, posted its worst annual return in decades. To put this into perspective, the iShares Core U.S. Aggregate Bond ETF (AGG), which tracks this index, suffered a -13.01% total return in 2022. Even more dramatically, longer-duration government bonds, as represented by the iShares 20+ Year Treasury Bond ETF (TLT), plummeted by -31.22% in the same year. This event should have been a wake-up call, yet many investors seem to have hit the snooze button.

The persistent view of bonds as the "safe" part of a portfolio can lead to a false sense of security. Many investors may be unknowingly exposed to duration risk, credit risk, or concentration risk within their bond holdings. The belief that bonds will always provide stability and income, regardless of market conditions, is a dangerous oversimplification in today's complex financial landscape.

A Nuanced Approach to Fixed Income

While our outlook on traditional bonds is cautious, this isn't a call to abandon fixed income altogether. Rather, it's a plea for a more nuanced, active approach to this crucial asset class. The key lies in understanding what you own and why you own it.

In the current environment, investors might consider alternatives to traditional long-duration government and corporate bonds. Treasury Inflation-Protected Securities (TIPS) can provide a hedge against inflation risk. Short-dated bonds can help mitigate interest rate risk. Collateralized Loan Obligations (CLOs), while more complex, can offer attractive yields with some protection against rising rates due to their floating-rate nature. Convertible bonds can provide a unique blend of fixed income stability with potential equity upside, which may be attractive in certain market conditions. High-yield bonds, although carrying higher credit risk, can offer enhanced income potential and may be less sensitive to interest rate changes compared to investment-grade bonds. 

However, it's crucial to emphasize that the specific mix of these instruments should be carefully tailored. The optimal allocation will depend on individual circumstances, risk tolerance, investment goals, and the prevailing market environment. A skilled advisor can help navigate these options and construct a fixed income portfolio that aligns with an investor's unique needs and the current economic landscape.

Most importantly, successful fixed income investing in today's market requires being intentional. It demands a thorough process that consistently monitors and manages these risks. At Vaultis, our investment team employs sophisticated research and a global perspective to navigate these choppy waters. We believe that active management, careful security selection, and a willingness to challenge conventional wisdom are essential in today's bond market.

Conclusion

The fixed income landscape is changing, and yesterday's safe haven may be tomorrow's unexpected risk. While bonds remain an important part of a diversified portfolio, the key is to approach fixed income with a tactical, well-informed strategy. As an investor, it's crucial to work with advisors who understand these nuances and can help navigate the complexities of the modern bond market. By staying informed, remaining vigilant, and adopting a more active approach to fixed income investing, you can better position your portfolio to weather the challenges and opportunities that lie ahead. In today's dynamic financial environment, a thoughtful and adaptable fixed income strategy is not just beneficial—it's essential for long-term financial success.

Disclosure:

This article is for informational purposes only and does not constitute investment advice. Investing involves risks, including possible loss of principal. Past performance does not guarantee future results. Fixed income securities are subject to various risks, including interest rate, inflation, credit, and default risk. Alternative investments like CLOs, convertible bonds, and high-yield bonds carry additional risks and may not be suitable for all investors. The views expressed are those of Vaultis Private Wealth as of the date of publication and are subject to change. Any forward-looking statements are based on current expectations but are not guarantees of future performance. Diversification and asset allocation do not ensure profit or protect against loss in declining markets. Before investing, consider your financial situation, goals, and risk tolerance, and read all offering documents carefully. Vaultis Private Wealth is a Registered Investment Advisor. More information about our services can be found in our Form ADV Part 2, available upon request.