[Reuters Breakingviews] US markets’ crisis point hinges on a triple threat

WASHINGTON, April 21 (Reuters Breakingviews) - A selloff in U.S. stocks, long-term government bonds and the dollar clearly traces back to policy choices by President Donald Trump's administration. Recent moves spawn a trio of worries: first, that a trade war will hit business and destabilize the United States' role in the world; second, that a $4.5 trillion tax cut plan could explode an already-historic fiscal deficit; and, finally, that pressure on Federal Reserve Chairman Jerome Powell could warp monetary policy. Trump has not yet forced an irrevocable break, but cracks are spreading at an alarming pace.

Investors are piling into short-term U.S. debt even as longer-term Treasuries sell off, a potential sign of hesitancy to bear the risk of erratic policy shifts. Yields on 20-year bonds US20YT=RR topped 4.9% on Monday. Similarly, cash is moving into non-U.S. assets as the dollar tumbles.

It makes some sense: Trump has imposed, then partially lifted, tariffs of a magnitude not seen in over a century, sparking worries of a break with the global community. The consequences are slow to filter through into economic data, but early signs are arising. South Korean exports to the U.S. tumbled 14% in April’s first 20 days from the year before, particularly hitting cars and parts.

The President places the onus on Powell, dubbing him “Mr. Too Late” for not lowering interest rates and warning that an economic slowdown could result. The Fed chair is clear that he prioritizes keeping price pressures anchored — making any move unlikely as the public’s inflation expectations shift well above the Fed’s target.

Trump has pondered firing Powell in a legally uncertain maneuver that would threaten the independence safeguarding the central bank’s credibility, though advisers including Treasury Secretary Scott Bessent have pushed back, the Wall Street Journal reported. Even if that one pillar of economic management remains intact, though, Republicans’ push for gigantic tax cuts is continuing, just as the U.S. budget deficit has widened to a near-record $1.3 trillion in the six months since October.

Negotiations are underway to stanch the red ink with spending cuts or revenue. But the U.S. sustains its fiscal profligacy thanks to international investors who treat Treasuries as the world’s risk-free asset. If they demand a meaningful risk premium, financing $36.6 trillion in national debt may become very expensive. With Trump pushing to bend monetary policy and the budget deficit potentially moving in the wrong direction, uncertainty is only rising.

Despite the gloom, U.S. capital markets still have no clear substitute. An orderly transition when Powell’s term ends in 2026 could smooth institutional frictions. And tariff-reducing trade deals could ameliorate the worst of the economic damage. But the slowly creeping cracks point to weaknesses that could explode if any one policy move pushes to a critical point.

Follow @Rubinations on X

CONTEXT NEWS

Long-term treasury yields climbed once again on April 21 after peaking earlier in the month, with 20-year Treasury yields rising above 4.9%.

President Donald Trump has leveled criticism at Federal Reserve Chair Jerome Powell, posting on social media that he should lower interest rates. Trump has discussed whether he could fire Powell before the end of his term in 2026, the Wall Street Journal reported.

The S&P 500 Index fell 2.8% by 12:30 p.m. ET on April 21 amid a lack of progress towards agreements with U.S. trading partners that would lower tariffs introduced earlier this month.

The Republican-controlled House of Representatives and Senate have started work on drafting a package to advance Trump’s legislative agenda, with debate beginning over spending cuts needed to offset the cost of extending and expanding tax cuts for individuals and businesses.

Economic uncertainty ratchets up under Trump