Trump's threats send Wall Street hunting for the perfect Powell hedge

Powell maintains the Fed would have cut rates if Trump's tariff war hadn't clouded the economic outlook

- Bloomberg

On Wednesday morning, as markets worldwide shuddered on news that US President Donald Trump was likely to fire Federal Reserve (Fed) chair Jerome Powell, James van Geelen at Citrini Research wasted no time in blasting a "macro trade" alert to his some 50,000 clients.

In it was a simple recommendation: buy two-year Treasuries and sell US 10-year notes.

The theory is that a new Fed chair would be more likely to fall in line with Trump's lobbying for lower interest rates, and that would push down short-term yields.

Easier monetary policy, coupled with the perceived loss of the central bank's independence, could in turn stoke inflation concerns, driving yields on long-term debt higher.

This is exactly what happened, and more, in the minutes after the Powell headlines.

Call it the Powell hedge.

Like many on Wall Street and beyond, van Geelen is taking the once-unthinkable threat seriously—and that means protecting against it.

That's why even after Wednesday's knee-jerk moves reversed a bit when Trump downplayed any imminent plan to force out Powell, van Geelen stuck to his recommendation. Others are doing the same.

"We would have always assumed there is no basis for firing a Fed chair and the Fed has been immune from political interference," said Mark Dowding, chief investment officer of the BlueBay Fixed Income unit at RBC Global Asset Management. "There is a clear sense that this is now changing."

For many investors, including Dowding and some of his counterparts at firms such as Allspring Global Investments and Invesco Ltd., the perfect Powell hedge conforms with positions they've held for a while now, from bearish dollar bets to the so-called steepener trade, which benefits from a widening gap between short- and long-term yields.