The US is a federal republic. It isn’t a democracy, where the majority always rules. The constitutional system was designed by the Founding Fathers, who were mostly lawyers, to provide checks and balances to avert the concentration of political power and to protect the rights of minority parties against abuses by the majority as well as by those in power. The three branches of government were designed to frustrate the ambitions of the powerful on a regular basis.
In other words, “gridlock” is a feature, rather than a bug, of the American constitutional system. Gridlock has generally been viewed as bullish by stock and bond investors. The companies they invest in tend to do best when the government is the least meddlesome in their businesses.
The system is working as designed to keep the ambitions of the current administration in check, just as it has those of previous administrations. The latest example is that the future of Trump’s tariffs is now in the hands of the courts. On Wednesday, a lower court struck down most of Trump’s tariffs. Today, a federal appeals court paused that ruling. The Supreme Court might determine the fate of Trump’s tariffs.
The checks-and-balances system applies to the Federal Reserve. President Donald Trump met with Fed Chair Jerome Powell today. The President wants the Fed to lower immediately. Powell and his colleagues have stated that they are in no rush to do so. That view was reiterated in the minutes of the May 6-7 released yesterday.
Powell said the two discussed “economic developments”—but not his expectations for monetary policy—during the White House meeting called by the President.
The federal funds rate futures market is currently anticipating three 25-bps over the next 12 months (chart). We remain in the none-and-done camp through the end of this year.
The Fed is in no rush to lower interest rates because the economy remains resilient. The Bureau of Economic Analysis revised its estimate of Q1’s real to show the economy shrank at an annual rate of 0.2% (saar), compared with the previously reported 0.3% drop. However, that contraction was attributable to a 42.6% spike in imports—driven largely by companies racing to get ahead of Trump’s tariffs (chart).