Did the Stock Market Just Fire a Warning Shot at Trump?

Disclaimer: Whenever I lean on my finance degree to talk about the stock market it is obviously not financial advice

The Federal Reserve cut interest rates by a quarter point yesterday, continuing their policy pivot away from the higher for longer interest rates they used to combat inflation. The Fed determined that inflation had peaked, and the threat had receded to the point where they did not think they were making the same mistake as policymakers made in the 1970s by easing too quickly, and thus potentially causing another spike in inflation.

But this was no celebratory cut, as the market experienced its worst ‘Fedsday’ since 2001, as the Dow Jones fell two and a half percent, the S&P 500 fell just under three percent and the Nasdaq fell a little over three and a half percent. Crypto is tanking hard as I write this, as Bitcoin fell a little over five and a half percent yesterday, and many shitcoins’ value has been cut by a third or more since Federal Reserve Chairman Jerome Powell spoke.

The most obvious reason why the market fell hard is at the last Fed meeting, they had indicated they were going to cut four times in 2025, but now, the Fed has reduced this projection to two. Why?

Like all monetary policy, there is a dry, boring reason behind the decision, as Jerome Powell said, “with today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” and that “we moved pretty quickly to get to here, and I think going forward obviously we’re moving slower.”

Monetary policy takes a year or longer to really affect the economy, and so given the uncharted waters they are trying to navigate in the wake of this inflationary shock, a more defensive and cautious posture is in line with the Fed’s mindset both on the way up and on the way down of this journey that’s taught Americans about the magic of interest rates. But the reality Trump’s election presents is intertwined with this decision whether the self-described politically independent Fed wants it to be or not. Treasury bond yields spiked the day after the election, and long-term yields are even higher today. The largest, most liquid market in the entire world is very clearly adjusting to the new political reality we inhabit.

The other big economic development out of yesterday was the Congressional Budget Office’s estimate of Trump’s tariffs finding what basically every other analysis has found, that it would lead to higher inflation and slower economic growth, which is part of what high-level analysts on Wall Street have been calling the Trump Trade since at least Joe Biden’s calamitous debate. The “uncertainty” described by the Fed in their analyses published since the election is about a lot of things, but it definitely incorporates Trump’s restrictive tariffs into that language.

The market seems to have finally digested the brutal reality of capitalism it holds so dear. Additional costs get passed down to the consumer, and no amount of propaganda from the White House can change that. If Trump enacts his tariffs, and he has already said he will do so via an executive order, it will create a lot of uncertainty for the economy, and the market is finally accepting that, as demonstrated by the elevated VIX that spiked up yesterday to around the 2021-2023 inflationary baseline.

The VIX is one of the market’s favored “shit hitting the fan” indicators, for lack of a better term. It is a descriptive more than a predictive measure which tells you that when elevated, things are probably bad or uncertain, and earlier this year it had a historic spike on par with bottoming out during the pandemic and the Great Recession. The market fell hard coming off a very weak jobs report in August which activated the Sahm Rule which has historically been good at predicting recessions, as the notion that this economy is roaring became very much in doubt. Biden did a lot of good for the economy, but prices are still too high, and too many people cannot afford to live in our wildly expensive society, and there are plenty of other indicators showing how fragile this growth is—all while Trump’s tariffs threaten it.

When the VIX spiked back in August, it dropped back down the next day and made its descent to the post-inflationary baseline, which buttressed a lot of smart folks’ assumptions that was just an outlier move and the Japan carry trade going away was not actually on par with the Great Recession. However, yesterday’s VIX spike has not retraced today, and it remains elevated around the post-2020 inflationary baseline. Crypto nuking suggests that people are cutting their risk, all of which indicates that the market is finally taking Trump’s threats to tank the economy seriously.

There are many twists and turns remaining on this saga, and Trump is very attuned to the whims of the market and will likely try to assuage its concerns in some way, but given that the market was down on the year the last time he enacted his tariffs in 2018 and smart money is literally betting on high inflation and low growth, I’m not sure what Trump could say to change the economic reality he’s already created for himself.