Trump's Feud With the Fed: Should Investors Be Worried?

All of the major stock market indices were sharply lower on Monday, with the Dow Jones Industrial Average, S&P 500, and Nasdaq-100 all down by about 3% for the day, adding to recent declines.

The main reason for the declines is President Donald Trump's intensifying pressure on Federal Reserve Chairman Jerome Power to lower interest rates. In a social media post, Trump warned that the U.S. economy could slow down unless interest rates were to fall right away and called on Powell to do just that.

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To be sure, Trump's criticism of the Fed, and Powell in particular, is nothing new. Although Trump himself appointed Powell during his first term, he frequently criticized Powell in the years leading up to the COVID-19 pandemic for raising interest rates despite a lack of inflation.

What's different this time?

The major difference this time is that Trump has openly mentioned Powell's "termination," even though the president doesn't (at least under most interpretations) have the legal authority to fire the Federal Reserve chair. Not only is Trump making comments like this on social media, but Trump's legal team is reportedly investigating whether he can legally remove Powell.

For context, Powell's term as Fed chair officially expires in May 2026. And Powell has made it very clear he intends to finish his term, and that Trump cannot legally remove him.

Powell has also discussed Trump's trade war as a potential reason rates could stay elevated. He recently said that "For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance." In other words, despite Trump's criticism, he's in no rush to lower rates.

Should investors worry?

The reason investors seem to be on edge is that the independence of the Federal Reserve has been a key part of the U.S. financial system for many years.

Several financial experts and notable politicians have warned investors about what could happen if Trump actually attempts to fire Powell. Senator Elizabeth Warren, D-Mass., who has herself openly questioned the Fed's decision to keep interest rates relatively high, warned that the stock market could crash if Trump attempts to fire Powell. Evercore ISI Vice Chairman Krishna Guha said the market would likely sell off. CNBC senior analyst Ron Insana said that such a move would hurt global confidence in the United States.

Are investors already losing confidence?

There are some signs that investors are already getting concerned. In addition to the stock market plunge, the U.S. dollar has weakened dramatically and is at its lowest level since the 2022 bear market. Meanwhile, "safe" assets have been soaring, such as gold, which hit a record high on Monday.

One big principle to keep in mind is that the stock market doesn't like uncertainty, and that's a lot of what you're seeing in the recent market action. The CBOE Volatility Index (VOLATILITYINDICES: ^VIX) -- often referred to as simply as the "VIX" -- is generally thought of as the best gauge of investor fear in the stock market. While it isn't quite where it was immediately after Trump's tariff announcement a couple of weeks ago, the VIX sits at more than double the level immediately after the November presidential election.

Should investors worry, or look for bargains?

This is the million-dollar question. First off, if you're a long-term investor, there's no need to panic and sell investments you plan to hold for the long run, as long as the original reasons you bought them still apply. As a personal example, I'm in my mid-40s, and absolutely will not sell anything in my retirement accounts over this.

Having said that, it could be a smart time to take a cautious approach to investing, especially when it comes to putting new money to work in fast-growing or somewhat speculative companies. While none of us have a crystal ball that can predict the future, it would be wise to expect that we haven't seen the last of the 2025 market volatility. This is an unprecedented situation, and all any investor (or any expert) can really do is make educated guesses about what might happen in certain scenarios.

This is the type of situation where it can be beneficial to use strategies like dollar-cost averaging to gradually build positions in stocks or ETFs you want to own for the long term. Historically, when the S&P 500 pulls back by more than 15% from its recent high, like it has in 2025, it's a good time to invest from a long-term perspective. But that doesn't mean stocks can't fall even further, so keep this in mind as you navigate this turbulent market environment.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.