Federal Reserve Prepares to Rescue Markets Amid Trump's Trade War

Donald Trump’s escalating global trade war has pushed markets to the brink this week, causing a spiralling U.S. dollar "confidence crisis" amid fears of "collapse." The Federal Reserve, which stepped in to calm markets during the Covid panic, is closely watching the $29 trillion Treasury market for signs convulsions caused by Trump’s tariffs could turn into a full-blown financial crisis.

Now, as Treasury secretary Scott Bessent issues a surprise prediction, a top Federal Reserve official has said it “would absolutely be prepared" to step in to rescue markets if U.S. president Trump’s trade war threatens the financial system. Susan Collins, head of the Boston Fed, told the Financial Times, referring to previous times the Fed has moved to calm chaotic markets at times of low liquidity or market malfunctions. “We have had to deploy quite quickly, various tools,” she said. “We would absolutely be prepared to do that as needed.”

However, Collins, who fears Trump’s tariff trade war could send inflation back above 3% in 2025, said that currently “markets are continuing to function well” and that “we’re not seeing liquidity concerns overall," adding the Fed “does have tools to address concerns about market functioning or liquidity should they arise.”

JPMorgan chief executive Jamie Dimon has predicted the Federal Reserve will be forced to step in and bail out the near-$30 trillion U.S. Treasury market following U.S. president Donald Trump’s campaign of rapid-fire global tariffs. “There will be a kerfuffle in the Treasury markets because of all the rules and regulations,” Dimon said in a Friday earnings call, warning that the Fed won’t act until “they start to panic a little bit."

Dimon suggested the Fed could ditch a rule that exempts Treasuries from leverage ratio calculations, something that would allow institutional investors to buy more bonds without breaking capital requirement rules. “If they don’t [change the rules], the Fed will have to intermediate, which I think is just a bad policy idea,” Dimon said.

Earlier this month, traders ramped up their bets that the Federal Reserve will be forced to cut interest rates to stave off a U.S. recession—something that could see the market “flooded” with dollars—though Collins said emergency rate cuts would not be the Fed’s primary tool for responding to market’s failing.

In 2020, ahead of one of the largest ever stock market rallies that saw the bitcoin price and crypto market surge to never-before-seen heights, the Fed restarted its 2008 financial crisis-era programs of quantitative easing while cutting rates to near-zero and scrapping its cap on the number of Treasuries it could buy—fueling expectations the Fed could again turbo charge the bitcoin price.

This coming week, Fed chair Jerome Powell, who is at loggerheads with Trump over the need for interest rate cuts, is due to speak at the Economic Club of Chicago on Wednesday in what will be a closely-watched speech.

Trump’s fast-moving approach to tariffs and trade negotiation—that’s seen China hit with levies of almost 150% before a carve out was announced for smartphones, computers and some other electronics—has seen the U.S. 10-year Treasury yield jump 0.5 percentage points to 4.5% over the past week, spooking markets with its outsized swings.

Meanwhile, business leaders on Wall Street and across the U.S. are warning the economy is buckling under the pressure of tariff uncertainty. BlackRock chief executive Larry Fink has warned the U.S. may already be in a recession due to Trump’s sweeping tariffs while JPMorgan’s chief executive Jamie Dimon has said recession is the “likely outcome” of Trump’s trade war.

Summary: The Federal Reserve is prepared to intervene in the Treasury market if Trump's tariffs threaten financial stability. Susan Collins, head of the Boston Fed, confirmed the Fed's readiness to use various tools to address market functioning or liquidity concerns. Jamie Dimon, CEO of JPMorgan, predicted the Fed will need to step in to bail out the Treasury market due to Trump's tariffs. The Fed's tools include quantitative easing and rate cuts, though Collins noted that emergency rate cuts would not be the primary tool. The market is closely watching Fed Chair Jerome Powell's upcoming speech for further insights.

Analysis: The escalating trade war under Trump has created significant market volatility and uncertainty. The Fed's readiness to intervene reflects the seriousness of the situation and the potential for a financial crisis. The predictions by Dimon and the Fed's historical actions during the Covid panic and the 2008 financial crisis suggest that the Fed is prepared to take aggressive measures if necessary. The upcoming speech by Powell will be crucial in providing further clarity on the Fed's stance and potential actions.