Source: Miao Tou APP

The plunge in US stocks may be another means by which Trump forces the Federal Reserve to cut interest rates quickly.

On March 10, 2025, Eastern Time, the US stock market experienced a dramatic plunge. The Nasdaq index fell 4% in a single day, the largest single-day decline 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%.

Tech stocks led the decline, with the once-market darling - NVIDIA - falling 5.1%, down nearly 20% so far this year (as of the close on March 11); Tesla even plummeted more than 15% on the day, the largest single-day decline in more than 4 years, with its market value evaporating $130 billion overnight.

The trigger for all this seems to be Trump's remarks over the weekend - Trump refused to predict whether the US would face a recession in an interview, instead saying the economy was in a "transition period" or "birth pains". Trump's remarks were interpreted by the market as a sign that the US economy may be facing serious difficulties, triggering investor concerns about a hard landing for 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 stock market plunge is not accidental, but rather Trump's "self-inflicted wound" - by creating economic panic, forcing the Federal Reserve to cut interest rates quickly.

#01 Trump's "Recession"

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

First, the current debt situation in the US has indeed reached an alarming level. The US national debt has exceeded $36 trillion, and according to Larry McDonald, a former Lehman Brothers trader and founder of the Bear Traps Report, if the current 4.5% interest rate level is maintained, by 2026 the US debt interest payments could soar to $1.2-1.3 trillion, exceeding defense spending, making the fiscal deficit unsustainable.

To reduce interest payments, the Trump administration is not hesitant to lay off employees, freeze infrastructure projects, and even plan "debt swaps" (borrowing new to pay off old). McDonald estimates that if the Federal Reserve cuts interest rates by 100 basis points, the US can save $400 billion in interest payments, which can also create space for the government to issue debt.

Second, Trump hopes to promote the return of US manufacturing through a low-interest rate environment to solve the problem of industrial hollowing-out. Trump won the election in 2024 on the slogans of "reviving manufacturing" and "tariffs to protect America", but the actual policy implementation has not yielded satisfactory results.

To force the Federal Reserve to cut interest rates quickly, Trump has repeatedly used public criticism and policy pressure, but the Federal Reserve has not yielded to Trump's relentless pressure. After cutting interest rates by a cumulative 100 basis points last year, the Federal Reserve has "hit the brakes".

In late January 2025, Federal Reserve Chair Powell stated that the Federal Reserve is in no hurry to adjust its policy stance and needs to observe data and the effects of Trump's policies.

On March 7, Powell reiterated "maintaining patience", emphasizing that the current economic fundamentals are sound, the labor market is balanced, and inflation, although not reaching the 2% target, is not at risk of getting out of control, so there is no need to rush to adjust interest rates. This stance was interpreted by the market as a signal that the Federal Reserve is refusing political blackmail.

Against this backdrop, Trump has increased the pressure - starting to "go all out", using the creation of panic sentiment to threaten the Federal Reserve. For example, he has pushed for high-tariff policies, demanded a self-audit of the US gold account, supported the Musk government efficiency committee's layoffs, and the weak non-farm data (unemployment rate rising to 4.1%) has further exacerbated market unease. The plunge in US stocks has naturally also become part of the game between Trump and the Federal Reserve.

This series of actions is interpreted as the Trump administration's intention to force the Federal Reserve to cut interest rates by deliberately causing a market recession and stimulating panic sentiment.

Former Lehman Brothers trader Larry McDonald said in a recent podcast that Trump is deliberately engineering an economic recession in order to force the Federal Reserve to cut interest rates and reduce the US government's interest payments.

This strategy of the Trump administration is also seen as an economic "gamble", relying 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 a repeat of the Hoover era and instead following a path closer to the Roosevelt era. As the economic crisis of the 1930s taught, in times of crisis, the coordination of monetary policy and fiscal policy is far more important than simply relying on free market forces.

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

#02 Powell "Unruffled"

Although market panic sentiment is spreading, Powell remains "unruffled", which is not difficult to understand - the Federal Reserve must maintain its independence, and its decisions are primarily based on economic data and inflation expectations (the target is 2%), rather than political pressure.

Currently, the US inflation level is still higher than the target, and there are expectations of further heating up.

US inflation is at a critical turning point, after experiencing a sustained downward trend from the second half of 2023 to 2024, it has shown signs of rebound in early 2025. According to data released by the US Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 3.0% year-on-year in January, higher than the expected 2.9%, marking the fourth consecutive month of rebound and returning to the "3% era" after 7 months.

Particularly worrying is Trump's tariff policy, which Powell believes may drive up the prices of certain goods and could complicate the Federal Reserve's efforts to fight inflation.

For example, high tariffs will increase the cost of US imports, pushing up the prices of US goods, leading to rising costs for manufacturing companies, especially those relying on the Chinese supply chain who cannot find equally cost-effective alternatives. In addition, tariffs may also provoke retaliation from other countries. For instance, Canada may impose tariffs on US products, Mexico may suspend its automotive parts cooperation with the US, and these could further increase inflationary pressures in the US.

Historically, similar tariff measures have proven to have the effect of driving up prices. In February 2018, Trump imposed a 20% tariff on imported washing machines, and the result was that washing machine prices rose by about 18.2% in the following months, almost matching the tariff rate.

The Morgan Stanley research department recently issued a report forecasting that US inflation will rise to 2.5% in 2025, higher than the 2.3% forecast in December last year. More pessimistically, the University of Michigan consumer survey shows that US inflation expectations for the next 12 months have risen to 4.3% (the highest in nearly 30 years), and long-term expectations have reached 3.5%.

If US inflation continues to heat up, the Federal Reserve's window for interest rate cuts will be completely welded shut. The Federal Reserve believes that if it eases monetary policy too early at this time, it may repeat the "stagflation" of the 1970s. As the lessons of the 1970s show, misunderstanding the nature of inflation and easing monetary policy too early may lead to persistently high inflation, ultimately forcing the Federal Reserve to implement more aggressive tightening policies, which not only failed to control inflation, but also caused greater damage to the economy.

More importantly, the Federal Reserve is not pessimistic about the US economy. Powell believes that the US economy as a whole remains in good shape.

Here is the English translation: Although the unemployment rate rose to 4.1% in February 2025, the highest level since November 2024, which has raised market concerns about the slowdown in the U.S. economy, Powell still believes that this cooling is foreseeable and to some extent is the expected result of the Federal Reserve's strategy to curb inflation. The February non-farm employment report showed that the U.S. added 151,000 jobs, which, although lower than expected, still indicates moderate growth in the job market. This data supports Powell's view - the current economic growth is stable, and monetary policy does not need to be overly loose. The Federal Reserve is more inclined to continue to maintain a prudent policy rather than make an overreactive response to short-term market fluctuations. In the past, faced with a market crash, the Federal Reserve would usually take timely measures to quickly stabilize market sentiment, but now it has taken a more cautious approach, seemingly choosing to "watch and see" in this market fluctuation. Now the positions of the market, the Federal Reserve, and Trump are in stark contrast. The market generally believes that the plunge in the U.S. stock market is due to growing concerns about a recession in the U.S. economy; the Federal Reserve insists that the U.S. economy is still "good" and there are no signs of a recession, so it is in no hurry to cut interest rates; Trump insists that the U.S. economy will go through a "transition period" or "growing pains", refusing to predict whether a recession will occur, hinting that the U.S. may be in a stage of adjustment and transition. These three perspectives reflect different considerations in the economic game: the market is concerned about future uncertainties, Trump is trying to put pressure on the Federal Reserve through policy statements and market reactions, while the Federal Reserve relies on data and the economic fundamentals, appearing more calm and rational.