A recession is brewing in the US

Source: MiaoTou APP

The plunge in US stocks may be another means for Trump to force the Federal Reserve to cut interest rates as soon as possible.

On March 10, 2025, Eastern Time, the US stock market staged a thrilling plunge. The Nasdaq index fell 4% in a single day, the largest single-day drop since September 2022; the S&P 500 index fell 2.7%, the worst single-day performance since December 18, 2024; the Dow Jones index closed down 2.08%.

Technology stocks led the decline, and Nvidia, once a market darling, fell 5.1%, and its decline so far this year was close to 20%(as of the close of March 11); Tesla plunged more than 15% that day, the largest single-day drop in more than four years, and its market value evaporated by $130 billion overnight.

The trigger for all this seems to be Trump's remarks over the weekend - in an interview, Trump refused to predict whether the United States would face an economic recession, instead saying that the economy was in a "transitional period" or "pain period". Trump's remarks were interpreted by the market as the US economy may soon face serious difficulties, causing investors to worry about a hard landing of the US economy.

Behind this plunge, there seems to be a deeper game between Trump and the Federal Reserve. More and more market analysts are beginning to suspect that the US stock market crash is not accidental, but is actually a "bitter trick" by the Trump administration - by creating economic panic, forcing the Federal Reserve to cut interest rates as soon as possible.

#01 Trump "Recession"

Why is Trump so eager for the Federal Reserve to cut interest rates?

First, the current US debt situation has indeed reached a warning level. The size of the U.S. national debt has exceeded $36 trillion. According to Larry McDonald, a former Lehman Brothers trader and founder of Bear Traps Report, if the current interest rate level of 4.5% is followed, the U.S. debt interest expenditure may soar to $1.2 trillion to $1.3 trillion by 2026, exceeding defense spending, and the fiscal deficit is overwhelmed.

In order to cut interest payments, the Trump administration has laid off employees, frozen infrastructure projects, and even planned "debt swaps" (borrowing new to repay old). McDonald estimates that if the Federal Reserve cuts interest rates by 100 basis points, the United States can save $400 billion in interest payments, which can also make room for the government to issue bonds.

Second, Trump hopes to promote the return of U.S. manufacturing and solve the problem of industrial hollowing out through a low interest rate environment. Trump won the election in November 2024 with slogans such as "manufacturing revival" and "tariffs to protect the United States", but the actual effect of the policy implementation was not ideal.

In order to force the Fed to cut interest rates as soon as possible, Trump has repeatedly used public criticism and policy pressure to pressure the Fed, but in the face of Trump's step-by-step pressure, the Fed has not compromised. After a cumulative interest rate cut of 100 basis points last year, the Fed "stepped on the brakes".

In late January 2025, Fed Chairman Powell said that the Fed is not in a hurry to adjust its policy stance and needs to observe the data and the effects of Trump's policies.

On March 7, Powell reiterated that "stay patient", emphasizing that the current economic fundamentals are sound, the job market is balanced, and although inflation has not reached the 2% target, there is no risk of getting out of control, so there is no need to rush to adjust interest rates. This statement was interpreted by the market as a signal that the Fed refuses political kidnapping.

Against this background, Trump increased the pressure - he began to "take drastic measures" and threatened the Fed by creating panic. For example, he pushed for high tariffs, demanded a self-examination of the US gold ledger, supported Musk's government efficiency committee layoffs, and weak non-farm data (unemployment rate rose to 4.1%) further exacerbated market anxiety. The plunge in US stocks has naturally become part of the game between Trump and the Federal Reserve. This series of actions is interpreted as a "combination punch" by the Trump administration to force the Federal Reserve to cut interest rates by causing a market recession and stimulating panic. Former Lehman Brothers trader Larry McDonald said in a recent podcast that Trump is deliberately creating an economic recession in order to force the Federal Reserve to cut interest rates and reduce the US government's interest expenses. This strategy of the Trump administration is also seen as an economic "gamble" that relies on short-term economic pain to break the monetary policy deadlock and pave the way for long-term healthy growth.

Trump seems to be trying to find a balance between fiscal stimulus and debt management, avoiding the mistakes of the Hoover era and moving closer to the path of the Roosevelt era. As the economic crisis of the 1930s taught us, in times of crisis, the coordination of monetary and fiscal policies is far more important than relying solely on market freedom.

But this choice is not without risks. Interfering with the independence of the Federal Reserve may increase long-term inflation expectations, which is not conducive to the dollar's status as a reserve currency. While reducing the actual debt burden through "financial repression", it may also trigger fluctuations in the global capital market and accelerate the process of "de-dollarization".

#02 Powell "does not panic"

Despite the spread of market panic, Powell "stayed calm in the face of danger". The reason behind this is not difficult to understand - the Federal Reserve must maintain its independence, and its decision-making mainly depends on economic data and inflation expectations (the target is 2%), rather than political pressure.

Currently, the inflation level in the United States is still above the target, and there is an expectation of further warming.

US inflation is at a critical turning point. After a continuous decline from the second half of 2023 to 2024, there are signs of a rebound in early 2025. According to data released by the US Department of Labor, the Consumer Price Index (CPI) rose 3.0% year-on-year in January, higher than the expected 2.9%. This is the fourth consecutive month of rebound and a return to the "3 era" after a lapse of 7 months.

Particularly worrying is Trump's tariff policy, which Powell believes may push up prices of certain commodities and may complicate the Fed's efforts to fight inflation.

For example, high tariffs will increase the cost of US imports, push up the price of US goods, and lead to higher costs for manufacturing companies, especially those that rely on the Chinese supply chain. It is difficult to find alternatives with the same cost-effectiveness. In addition, tariffs may also trigger countermeasures from other countries. For example, Canada may impose tariffs on US products, and Mexico may suspend cooperation with the United States on auto parts, which may further increase inflationary pressure in the United States.

Historically, similar tariff measures have proven their effectiveness in pushing up prices. In February 2018, Trump imposed a 20% tariff on imported washing machines. As a result, in the following months, the price of washing machines rose by about 18.2%, almost matching the tariff. Morgan Stanley Research recently released a report saying that it expects the US inflation rate to rise to 2.5% in 2025, higher than the 2.3% forecast in December last year. More pessimistically, the University of Michigan Consumer Survey showed that US inflation expectations for the next 12 months rose to 4.3% (the highest in nearly 30 years), and the long-term expectation reached 3.5%. If US inflation continues to rise, the Fed's window for cutting interest rates will be completely welded. The Fed believes that if it turns to loose policy too early at this time, it may repeat the "stagflation" of the 1970s. As the lessons of the 1970s showed, misunderstanding the nature of inflation and easing monetary policy too early can lead to long-term high inflation, eventually forcing the Fed to implement more aggressive tightening policies, which not only fails to control inflation, but also causes greater harm to the economy.

More importantly, the Fed's attitude towards the US economy is not pessimistic. Powell believes that the US economy remains in good shape overall.

Although the unemployment rate rose to 4.1% in February 2025, the highest level since November 2024, which has triggered market concerns about the slowdown of the US economy, Powell still believes that this cooling is foreseeable and to some extent an expected result of the Fed's strategy to curb inflation.

The February non-farm payrolls report showed that the United States added 151,000 jobs, which was lower than expected, but still showed moderate growth in the job market. This data supports Powell's view that the current economic growth is stable and there is no need for excessive monetary policy easing. The Fed prefers to continue to maintain a prudent policy rather than overreact to short-term market fluctuations.

In the past, when faced with a market crash, the Federal Reserve usually took timely measures to quickly stabilize market sentiment, but now it has adopted a more cautious attitude and seems to choose to "wait and see" in this market fluctuation.

Today, the positions of the market, the Federal Reserve and Trump are in sharp contrast. The market generally believes that the plunge in US stocks is due to the growing concerns about the US economic recession; the Federal Reserve insists that the US economy is still "good" and there is no sign of recession, so it is not in a hurry to cut interest rates; Trump insists that the US economy will go through a "transition period" or "pain period", refusing to make a prediction on whether it will enter a recession, suggesting that the United States may be in a stage of adjustment and transition.

The perspectives of the three parties reflect different considerations in the economic game: the market is worried about future uncertainties, Trump tries to put pressure on the Federal Reserve through policy remarks and market reactions, while the Federal Reserve relies on data and economic fundamentals, appearing more calm and rational.

#03 See who blinks first

The tension between Trump and Powell has a long history, and the core disagreement between them mainly revolves around monetary policy and the independence of the Federal Reserve. Trump believes that the president should have a say in monetary policy and interest rate setting, while Powell insists on the independence of the Federal Reserve and believes that a central bank that is not directly interfered with by the White House is of great benefit to the US economy.

As Anthony Pompliano, founder and CEO of Professional Capital Management Investment Company, said, if the stock market continues to plummet, it will come down to a contest between Trump and Powell on "who blinks first". At present, it seems that Trump has taken various measures to put pressure on the Federal Reserve, while the Federal Reserve has tried to stick to its independence.

But the wrestling between the Federal Reserve and the White House ultimately depends on three major variables:

(1) The direction of non-farm data. If inflation continues to fall and the unemployment rate exceeds 4.5% in the coming months, the Fed may be forced to cut interest rates; but if economic data is strong, Trump will face the risk of a stock market crash, forcing him to accept the Fed's monetary policy direction; (2) Political bargaining chip exchange. Trump may make adjustments to tariff policies (such as temporarily suspending tariffs on Canada) in exchange for the Fed's compromise, but Powell needs to balance the hawkish voices within the Fed; (3) Market sentiment critical point. The current market has priced in a 75 basis point interest rate cut in 2025. If the Fed insists on "standing still", it may trigger a double kill of stocks and bonds. In this case, the Fed may have to compromise, or at least take some measures to calm market sentiment. If Powell finally decides to cut interest rates ahead of schedule under continued pressure, this will bring new dynamics to global monetary policy and provide more room for China's monetary policy. For A-shares, the benefits will definitely outweigh the disadvantages.

But for the US stock market, no matter who "blinks" first, it is hard to be optimistic.

For the United States, the snowball effect of 36 trillion US debt is a systemic threat, but Trump's priority is still to consolidate political power, and his strategy is to "create a crisis first, then solve it."

After creating market panic, once the Federal Reserve is forced to start a large-scale interest rate cut, the economy is expected to recover, and Trump attributes it to his "successful economic policies" to pave the way for the 2026 mid-term elections. But such a strategy may bring more serious long-term risks, especially the worsening of the US debt problem, which may eventually form a vicious cycle of "sacrificing the economy to save the election."

The weakness of the US economy, the capriciousness of Trump's policies, the uncertainty of the trade war, and the government spending cuts driven by Musk are constantly undermining market confidence. At the same time, the logic of the market is also changing:The "exceptionalism" of US stocks is gradually weakening, and funds are flowing from highly valued US stocks to relatively undervalued markets, such as emerging markets such as China.

This plunge in U.S. stocks is not an ordinary market adjustment. It is more like a "stock market test" after Trump takes office in January 2025. The Nasdaq index has fallen 11% since he took office. The "Trump dividend" that investors once dreamed of has now become the "Trump stock crash" in the market. Once upon a time, the market was full of optimism about Trump's policies, expecting his economic stimulus and reforms to bring about a stock market boom; but today's reality is shocking.

In any case, this plunge in U.S. stocks has sent a clear warning signal to investors. Between the policy uncertainty of the Trump administration and the policy adjustments of the Federal Reserve, the market will experience a period of turbulence. Investors need to pay close attention to economic data and policy signals, do a good job of risk management, and adapt to the market fluctuations brought about by this game between "Trump and the Federal Reserve".