Bond Watch: the Trump rival who won’t back down

To the surprise of many, US President Donald Trump has won most of his key battles since taking office in January.  

He’s struck advantageous trade deals with the UK and European Union, secured investment from foreign companies in the US, and attacked Iran without sparking more conflict in the Middle East.  

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

However, one rival refuses to back down: US central bank boss Jerome Powell.  

Trump has repeatedly been pressuring Powell to cut interest rates. He wants lower rates as he thinks that would boost the economy, whereas Powell’s stance is that the US economy is already strong, and cutting rates is unnecessary and could lead to more inflation.  

Trump also believes that lower interest rates would lead to lower borrowing costs for the US government, which would ease the growing debt costs for his administration. 

• Benstead on Bonds: gilts and the pension time bomb
• Bond Watch: ‘stagflation spectre’ haunts gilts

This week, Powell decided to hold interest rates at 4.25% to 4.5%, despite Trump calling him Jerome “Too late” Powell in the run-up to the meeting and saying that interest rates were too high and Powell was being too slow in cutting them.  

After the Federal Reserve meeting on Wednesday, Powell indicated that the central bank would follow a “data dependent” approach. Inflation in the US has risen from 2.8% in June to 2.9% in July, and GDP growth in the second quarter of 2025 was a strong 3%. These indicators suggest a strong economy.  

In response, markets have dialled back bets on two further interest rate cuts this year, owing to a hot economy and clear resistance from Powell that he would not bow to pressure from Trump to cut rates.  

Max Stainton, senior global macro strategist at Fidelity International, said that Powell was deliberate in his efforts to emphasise data dependence, highlighting that two employment reports and two inflation reports are due between now and the September meeting. 

“This quiet hawkishness from Powell sets up a continuing political battle between the Fed and the executive, and is indicative of the broader political pressure that Powell and the committee will come under as a result of this pause,” he said. 

Looking ahead, Stainton expects inflation in the US to reach 3.5% at the end of the year, and for there to be only one more interest cut this year, in December.   

• Nick Train reveals new share he ‘should have owned years ago’
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

The battle between Trump and Powell is key to the outlook for bond and currency markets.  

If Trump has his way and rates comes down faster than markets currently expect, then this would likely be good news for bond prices, both in the US and the UK. However, if Powell continues to resist interest rate cuts, then bond yields could remain high.  

Another impact of US interest rates being higher for longer is that it should lead to the US dollar appreciating. This is because investors can get a good interest rate from US government bonds relative to other government bonds, and they need to buy US dollars (which increases the value of the dollar) to invest in these assets.