A recession is brewing in the US

The plunge in U.S. stocks may be another means for Trump to force the Federal Reserve to cut interest rates as soon as possible.

On March 10, 2025, Eastern Time, the U.S. stock market staged a thrilling plunge. The Nasdaq index plunged 4% in a single day, the largest single-day drop since September 2022; the S&P 500 index fell 2.7%, the worst single-day performance since December 18, 2024; and the Dow Jones index closed down 2.08%.

Technology stocks led the decline, with Nvidia, once a market darling, falling 5.1%, and its year-to-date decline is close to 20% (as of the close on March 11) ; Tesla's stock price plummeted by more than 15% on the day, its biggest one-day drop in more than four years, and its market value evaporated by $130 billion overnight.

The trigger for all this seems to be Trump's remarks over the weekend - in an interview, Trump refused to predict whether the United States would face an economic recession, and instead said that the economy was in a "transition period" or "pain period" . Trump's remarks were interpreted by the market as the US economy may soon face serious difficulties, causing investors to worry about a hard landing of 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 plunge in U.S. stocks is not accidental, but is actually a "trick of the trade war" by the Trump administration - to force the Federal Reserve to cut interest rates as soon as possible by creating economic panic.

#01Trump “recession”

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

First , the current debt situation in the United States has indeed reached an alarming level . The size of the U.S. national debt has exceeded 36 trillion U.S. dollars. According to the analysis of Larry McDonald, a former Lehman Brothers trader and founder of the Bear Traps Report, if the current interest rate level of 4.5% is maintained, the U.S. debt interest expenditure may soar to 1.2 trillion to 1.3 trillion U.S. dollars by 2026, exceeding defense spending, and the fiscal deficit is unbearable.

In order to cut interest payments, the Trump administration has laid off employees, frozen infrastructure projects, and even planned a "debt swap" (borrowing new debt to repay old debt) . McDonald estimates that if the Fed cuts interest rates by 100 basis points, the United States can save $400 billion in interest payments, which can also make room for the government to issue bonds.

Second, Trump hopes to promote the return of American manufacturing through a low interest rate environment and solve the problem of industrial hollowing out . Trump won the election in November 2024 with slogans such as "manufacturing revival" and "tariffs to protect the United States", but the actual effect of the policy implementation was not ideal.

In order to force the Fed to cut interest rates as soon as possible, Trump has repeatedly used public criticism and policy pressure, but the Fed has not compromised in the face of Trump's step-by-step pressure. After cutting interest rates by 100 basis points last year, the Fed "stepped on the brakes."

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

On March 7, Powell reiterated his “patience”, stressing that the current economic fundamentals are sound, the job market is balanced, and although inflation has not reached the 2% target, there is no risk of it getting out of control, so there is no need to rush to adjust interest rates. This statement was interpreted by the market as a signal that the Fed refuses to be held hostage by politics.

Against this backdrop, Trump stepped up the pressure and began to "take drastic measures" to threaten the Fed by creating panic . For example, he pushed for high tariffs, demanded a self-examination of the US gold ledger, supported Musk's government efficiency committee layoffs, and the weak non-farm data (unemployment rate rose to 4.1%) further exacerbated market anxiety. The plunge in US stocks naturally became part of the game between Trump and the Fed.

This series of actions was interpreted as a "combination punch" by the Trump administration to force the Federal Reserve to cut interest rates by causing a market recession and stimulating panic.

Former Lehman Brothers trader Larry McDonald said in a recent podcast that Trump is deliberately creating a recession in order to force the Federal Reserve to cut interest rates and thus reduce the U.S. government's interest expenses.

The Trump administration's strategy is also seen as an economic "gamble" that relies 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 the mistakes of the Hoover era and getting closer to the path of the Roosevelt era. As the economic crisis of the 1930s taught us, in times of crisis, coordination between monetary policy and fiscal policy is far more important than relying solely on market freedom.

But this option is not without risks. Interfering with the independence of the Federal Reserve may increase long-term inflation expectations, which is not conducive to the dollar's status as a reserve currency. While reducing the actual debt burden through "financial repression", it may also trigger fluctuations in the global capital market and accelerate the process of "de-dollarization".

#02 Powell is not panicking

Despite the spread of market panic, Powell remained calm. The reason behind this is not difficult to understand - the Federal Reserve must maintain its independence, and its decisions must rely mainly on economic data and inflation expectations (the target is 2%) , rather than political pressure.

Currently, the inflation level in the United States is still above target, and there is an expectation of further increase .

U.S. inflation is at a critical turning point. After a continuous decline from the second half of 2023 to 2024, there are signs of a rebound in early 2025. According to data released by the U.S. Department of Labor, the Consumer Price Index (CPI) rose 3.0% year-on-year in January, higher than the expected 2.9%. This is the fourth consecutive month of rebound and returned to the "3 era" after 7 months.

Of particular concern is Trump's tariff policy, which Powell said could push up prices of some goods and potentially complicate the Fed's efforts to fight inflation.

For example, high tariffs will increase the cost of US imports, push up the price of US goods, and lead to higher costs for manufacturing companies, especially those that rely on the Chinese supply chain, which find it difficult to find alternatives with the same cost-effectiveness. In addition, tariffs may also trigger countermeasures from other countries. For example, Canada may impose tariffs on US products, and Mexico may suspend cooperation with the US on auto parts, which may further increase inflationary pressure in the United States.

Historically, similar tariffs have proven their effectiveness in pushing up prices. In February 2018, Trump imposed a 20% tariff on imported washing machines, which resulted in a 18.2% increase in washing machine prices in the following months, almost matching the tariff.

Morgan Stanley Research recently released a report predicting that the US inflation rate 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 showed that US inflation expectations for the next 12 months have risen to 4.3% (the highest in nearly 30 years), and the long-term expectation is 3.5%.

If inflation in the United States continues to rise, the Fed's window for cutting interest rates will be completely blocked. The Fed believes that if it turns to an easing 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 long-term high inflation, and eventually force the Fed to implement a more aggressive tightening policy, which not only fails to control inflation, but causes greater damage to the economy.

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

Although the unemployment rate rose to 4.1% in February 2025, the highest level since November 2024, which raised market concerns about a slowdown in the US economy, Powell still believed that the cooling was foreseeable and to some extent an expected result of the Fed's strategy to curb inflation.

The February non-farm payrolls report showed that the United States added 151,000 jobs, which was lower than expected, but still showed moderate growth in the job market. This data supports Powell's view that the current economic growth is stable and there is no need for excessive monetary policy easing. The Federal Reserve is more inclined to continue to maintain a prudent policy rather than overreact to short-term market fluctuations.

In the past, faced with market crashes, the Federal Reserve would usually take timely measures to quickly stabilize market sentiment, but now it has adopted a more cautious attitude and seems to have chosen to "wait and see" during this market fluctuation.

Today, the positions of the market, the Federal Reserve and Trump are in sharp contrast. The market generally believes that the plunge in US stocks is due to growing concerns about a US recession; the Federal Reserve insists that the US economy is still "good" and there are no signs of recession, so it is not in a hurry to cut interest rates; Trump insists that the US economy will go through a "transition period" or "pain period", refusing to predict whether it will enter a recession, suggesting that the United States may be in a stage of adjustment and transition.

The respective perspectives of these three parties reflect different considerations in the economic game : the market is worried about future uncertainties, Trump is trying to put pressure on the Federal Reserve through policy remarks and market reactions, while the Federal Reserve relies on data and economic fundamentals, appearing to be calmer and more rational.

#03 See who blinks first

The tension between Trump and Powell is long-standing, with their core disagreement centering on monetary policy and the independence of the Fed. Trump believes the president should have a say in monetary policy and interest rate setting, while Powell insists on the Fed's independence, arguing that a central bank without direct interference from the White House is beneficial to the U.S. economy.

As Anthony Pompliano, founder and CEO of Professional Capital Management, said, if the stock market continues to plummet, it will come down to a contest between Trump and Powell of "who blinks first." At present, it seems that Trump has taken various measures to put pressure on the Federal Reserve, while the Federal Reserve is trying to stick to its independence.

But the wrestling between the Fed and the White House ultimately depends on three major variables:

(1) The direction of non-farm data . If inflation continues to fall and the unemployment rate exceeds 4.5% in the coming months, the Federal Reserve may be forced to cut interest rates; but if the economic data is strong, Trump will face the risk of a stock market crash, forcing him to accept the direction of the Federal Reserve's monetary policy;

(2) Exchange of political bargaining chips . Trump may make adjustments to tariff policies (such as temporarily suspending tariff increases on Canada) in exchange for compromise from the Federal Reserve, but Powell needs to balance the hawkish voices within the Fed;

(3) Critical point of market sentiment . The current market has priced in a 75 basis point interest rate cut in 2025. If the Fed insists on “standing still,” it may trigger a double kill of stocks and bonds. In this case, the Fed may have to compromise, or at least take some measures to calm market sentiment.

If Powell finally decides to cut interest rates ahead of schedule under continued pressure, this will bring new dynamics to global monetary policy and provide more room for China's monetary policy. For A-shares, the benefits will definitely outweigh the disadvantages .

But for the U.S. stock market, no matter who "blinks" first, it is hard to be optimistic .

For the United States, the snowball effect of the 36 trillion U.S. debt is a systemic threat, but Trump's priority is still to consolidate his political power, and his strategy is to "create a crisis first, then resolve it."

After creating market panic, once the Federal Reserve is forced to start large-scale interest rate cuts, the economy is expected to recover, and Trump attributes it to his "successful economic policies" to pave the way for the 2026 midterm elections. However, such a strategy may bring more serious long-term risks, especially the worsening of the US debt problem, which may eventually form a vicious cycle of "sacrificing the economy to save the election."

The weakness of the US economy, the erratic policies of Trump, the uncertainty of the trade war, and the government spending cuts driven by Musk are constantly undermining market confidence . At the same time, the logic of the market is also changing: the "exceptionalism" of US stocks is gradually weakening, and funds are flowing from highly valued US stocks to relatively undervalued markets, such as emerging markets such as China .

The U.S. stock market crash is not an ordinary market adjustment, but more like a "stock market test" after Trump takes office in January 2025. The Nasdaq index has fallen 11% since he took office. The "Trump dividend" that once made investors look forward to has now become the "Trump stock market crash" in the market. Once upon a time, the market was full of optimism about Trump's policies, expecting his economic stimulus and reforms to bring about a stock market boom; but the reality today is shocking.

In any case, this U.S. stock market crash has sent a clear warning signal to investors. Between the policy uncertainty of the Trump administration and the policy adjustments of the Federal Reserve, the market will experience a period of turbulence . Investors need to pay close attention to economic data and policy signals, do a good job of risk management, and adapt to the market fluctuations brought about by this game between "Trump and the Federal Reserve."